L.A. County's Montebello school district faces SEC investigation

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Montebello Unified School District officials confirmed Thursday that the district is the subject of a U.S. Securities and Exchange Commission investigation.

The district, which serves roughly 28,000 students in Los Angeles County, said in a statement that it “received a notice of an inquiry from the Securities and Exchange Commission” and is working with the SEC to understand the scope of the inquiry and that it intends to fully cooperate with the investigators. It didn't elaborate on details of the investigation.

Though the district released a statements to local media regarding the investigation a week earlier, it hadn't reported it as a material event on the Municipal Securities Rulemaking Board’s website by Friday morning.

The SEC investigation comes after a California State Auditor report that questioned the district’s ability to remain solvent and its use of bond funds.

The state auditor found among other issues that the district “did not ensure the proper oversight of millions in bond funds, putting these funds at risk of abuse — and failed to ensure that its employees did not have conflicts of interest when they approved expenditures and contracts related to the bond funds.”

The California State Auditor released the report on Nov. 2, warning that the district was in danger of becoming financially insolvent. MUSB had ignored warnings from its oversight agency, the Los Angeles County Office of Education, which had said it might be forced to take over the district and urged it to curtail deficit spending, according to the state auditor.

“Instead, the board continued to approve budgets in which expenditures exceeded revenues,” according to the audit.

Fitch Ratings analysts said in a release Dec. 5 that the ratings agency “has no way to determine at this point if the inquiry is material to the credit rating but will provide updates when available.”

Fitch assigned an A-minus issuer default rating to the district November 2016 and has affirmed it twice since then in connection with a 2017 issue that was postponed twice, said Karen Ribble, Senior Director & Regional Head of Fitch’s local government group in U.S. Public Finance.

The district also holds an AAA rating on the 2016 GO bonds based on a dedicated tax analysis without regard to the district’s financial operations, which Ribble said, reflects Fitch’s view that tax revenues levied to repay the bonds would be considered “pledged special revenues” in the event of a district bankruptcy and therefore would not be subject to the automatic stay.

Moody’s Investors Service downgraded $210 million of the district’s general obligation bonds to A1 from Aa3 in May and gave the district a negative outlook, citing “instability of district leadership, weakened financial reporting and controls, and the emergence of a significant budget gap projected in fiscal years 2018 and 2019.”

The district is currently being run by an interim superintendent, Anthony Martinez, who was named to the position after the board fired several people from leadership positions last year.

Superintendent Susanna Contreras Smith, chief financial and operations officer Cleve Pell, and Ruben Rojas, the chief business officer, were all let go.

Discussions about the district’s money problems date back to at least the 2015-16 school year. The board finally took steps early this year to address them when it authorized hundreds of employee layoffs, but it rescinded most of the pink slips following parent and student protests.

In August 2017, LACOE rejected Montebello's fiscal year 2017–18 budget because Montebello’s projections showed it would be unable to meet its financial obligations in fiscal years 2018–19 and 2019–20. It then notified the district on Nov. 10 that it was appointing Mark Skvama as a fiscal advisor to the district; and that he would have the power to stay and reject board decisions.

LACOE insisted earlier this year that the district cut $17 million from its budget – and advised it do so by laying people off, otherwise it would put the imperil the district and the county superintendent might have to take it over, said Robert Alaniz, a district spokesman and senior partner with Milagro Strategy Group.

The district has paid its teachers and employees well and avoided layoffs at all costs – even as enrollment declined with competition from charter schools, Alanziz said.

“They were tapping into budget reserves to pay for raises; and LACOE had warned the board not to do that,” he said.

Management of the bond program was among the concerns that led to the audit. Some of the employees being paid by the bond program, were not actually doing bond-related work, Alanziz said.

“It is an accounting issue, but they were being paid improperly,” he said.

Many of the positions for the bond oversight committee were not being filled; and the district had not provided the citizens oversight committee with reports.

The district has been working to “check all the boxes” to make changes following the recommendations made by the auditor, Alanziz said. The managers who were responsible for some of the issues are gone, he said.

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