Debt gone wild at the teetering Penn Hills School District has raised the specter of criminal probes after a scathing audit by Pennsylvania's auditor.
Bond analysts call it a case study on how not to run a school system.
State Auditor General Eugene DePasquale forwarded his audit to the Allegheny County district attorney's office, the U.S. Attorney for the Western District of Pennsylvania, the Department of Revenue, and the state Ethics Commission after asserting that "stunning financial mismanagement and illogical business decisions" pushed the district's debt from $11 million to $167 million over five years.
Penn Hills, 15 miles east of Pittsburgh with about 4,000 students, has been on the brink of default the past two years.
"At a minimum, it is the height of fiscal mismanagement and irresponsibility. At a minimum," DePasquale told reporters last week. "Do I personally believe there's a good chance that crimes were committed? Yes, but I'm going to leave that to law enforcement to make those final decisions."
DePasquale said the litany of wrongdoing from July 1, 2012, to June 30, 2015, featured conflicts of interest, cover-ups of critical independent audits and rampant abuse of credit cards intended for emergency use only, including the issuance of a retailer-specific card under an embossed name "Anyone in Uniform."
"That meant anyone with a Penn Hills School District shirt or ball cap could use the credit card to buy who knows what without showing any type of identification," said DePasquale. "That is insanity."
According to Moody's Investors Service, while Penn Hills' circumstances are unusual, the audit highlights how mismanagement and poor governance can push an already shaky issuer toward default.
"Financial troubles remain, but the report includes recommendations that would create a pathway for Penn Hills to slowly return to balanced operations," Moody's said in a commentary that also praised the district's recent new leadership for initiating corrective measures.
District Superintendent Nancy Hines said at Monday night's board meeting – the first since DePasquale's bombshell – that she didn't think the state would appoint a financial recovery officer.
"While this is certainly an option available to the state, it is my impression that the Pennsylvania Department of Education is not moving in that direction, at least not for now," she said as one parent out in the parking lot was telling T-shirts that read: "Penn Hills, just charge it."
Moody's assigns a junk-level B3 underlying rating and negative outlook to Penn Hills, and a B1 with negative to its pre-default and post-default enhanced ratings under Pennsylvania's school aid intercept program. Since fiscal 2014, the state under that program has stepped in to make debt payments due April 1, 2015, and April 1 and May 15 of this year.
According to the audit, $424,000 in the credit-card spending included doughnuts for meetings, lunches at local restaurants, sports equipment, hotel rooms for district consultants and even a residential water heater for $358.98. The district issued 24 such cards, even though only four people were authorized to use them.
"The audit press release is a litany of worst financial practices for a school district," said Alan Schankel, a managing director at Janney Capital Markets.
The audit also said the district borrowed $135 million in 2010 to cover the cost of constructing a new high school and elementary center, but did not adequately budget for related debt payments.
DePasquale said former business manager Richard Liberto ignored warnings in an architect's feasibility study that the district should raise taxes, consolidate three elementary schools and reduce staff to pay for construction expenses.
"Turns out the architect gave better business advice than the former business manager," said DePasquale.
The spiraling of long-term debt from less than $11 million in 2009 to more than $167 million in 2015 exceeded the district's entire operating budget for 2014 and 2015 combined. Meanwhile, said DePasquale, the district's general fund balance went from a "relatively healthy" $3.4 million in 2010 to negative $18.8 million in 2015.
DePasquale's report also said the district failed to monitor its transportation contractor, resulting in the loss of $384,500 in district fuel. Beyond that, the report said, it improperly sold its tax-exempt fuel to a municipality at a markup, but still lost thousands of dollars through billing ineptitude.
In addition, at least $22,000 from ticket sales to 18 district athletic events went missing. The district, said DePasquale, had no written procedures for collecting, safeguarding and depositing admission fees.
The audit also found that the district wrongfully hired two bus drivers with felony convictions, one with a drug offense and the other with an aggravated assault crime.
According to DePasquale, Liberto was simultaneously board treasurer and secretary, a direct violation of the state public school code that effectively negated any internal-control measures. The audit said Liberto received an independent audit on Jan. 12, 2015, but delayed presenting it to the school board. Its details leaked two months later after Liberto was placed on paid leave.
The board fired Liberto late last year. According to the Pittsburgh Post-Gazette, Liberto, now the Wilkinsburg School District business manager, denies the Penn Hills charges and has appealed the firing in the Allegheny County Court of Common Pleas.
Thomas Washington resigned as superintendent in January 2015. Hines officially succeeded him last July 1.
"They certainly inherited quite a mess," DePasquale said of Hines and new business manager Robert Geletko.
The school board makeup is now in compliance with the state public school code, said Moody's, and a system of timely financial reporting and enhanced transparency is in effect. The district is also developing a five-year budget with plans to correctly budget for debt payments, starting with fiscal 2017. It is also looking to cut charter school expenses, which spiked between 2010 and 2015.
"Many of the [audit] recommendations have already been implemented, a sign that the school board and new superintendent are committed to improving governance, prioritizing debt service and eliminating deficits, a credit positive," said Moody's.
Hines said in a statement that Penn Hills' "surface-level" problems, which parallel those of other distressed districts and include rising health-care costs and increased contributions to the Public School Employees' Retirement System, masked a multitude of shenanigans.
"Thankfully, as Mr. DePasquale pointed out, employees implicated in any way with improprieties are no longer here, the bus company is being replaced, and criminal investigations remain open."
According to Hines, the district will continue its own internal audits, both financial and academic.