how to steal a million dollars without breaking a sweat

September 12, 2017

Richard Michael

Another Taj Mahal for Downer Elementary School in West Contra Costa Unified

Nixon Peabody Letter on Bond Program Investigation Expenses

The following letter is an excellent example of the inbred corruption that occurs every day throughout California state and local governments.

The captured lawyers are enablers and they profit handsomely for doing absolutely nothing but providing cover for government agencies to violate the law and steal from the taxpayers.

Backdrop

The context for this analysis and commentary is the West Contra Costa Unified School District Citizens' Bond Oversight Committee Annual Report 2016 which was just released in August 2017. This 47-page report may have lots of other interesting tidbits, but what drew my attention was the table on page 15 headed "Bond Funds for the Forensic Accounting Investigation." What if the lawyer had known the district wanted to pay the full $1,072,822 cost of its corruption out of bond funds?

If you're not familiar with the situation at West Contra Costa Unified School District, there's a huge scandal still being played out in connection with it's multi-billion bond programs. Since the scandal erupted a few years, there's been some public outrage and some new members elected to the governing board. At some point, it might be hoped there will be some heads on pikes with these recidivist criminals, a.k.a., public servants, ending up in jail. One can only hope, however, since the Contra Costa District Attorney resigned earlier this year after being charged with crimes in connection with his use of campaign funds.

It always, always, always comes down to money.

In this case, it's bond money.

To wrap your head around this, you must understand that bond money, for school districts is considered "free money." It's different than other school funds. There are few employees who directly benefit. The money is spent in secret. The results of the spending take years to appear, or not appear, as the case may be. There is absolutely no accountability.

The nub of the issue is accountability and that's what the letter below is about. Who knew lawyers could be so good at math? As soon as they bring numbers into the picture, the public, the oversight committee, and every one else's eyes glaze over. It's a perfect scheme.

What's the Problem

In a nutshell, the lawyer assumes the role of David Copperfield or Criss Angel. He takes on the role of an illusionist by focusing your attention on what he wants you to see, not what he doesn't want you to see. He uses all the trickery at his command. He deceives you. And yes, it's intentional.

The lawyer got a request from the district to justify the spending of bond money to pay for the fallout of the ongoing corruption scandal. The lawyer is going to please the client. If he doesn't, the client will find another lawyer, who will please it.

Municipal bonds, like those issued by school districts, are steeped in several areas of law, some state, and some federal. On the federal side, you have anti-fraud, disclosure requirements that are allegedly regulated by the Securities and Exchange Commission. The other important federal issue is the tax-exempt status of the investment returns which is covered by your friendly Internal Revenue Service.

On the state side, there are all kinds of rules and regulations established by the Education Code, the Government Code, the Public Contract Code, etc., etc.

For the case of Proposition 39 bonds, however, there is also the paramount enabling law, the California Constitution, Article XIII-A, which lays out the specifics for which bond proceeds shall be expended -- in a phrase -- school facilities.

Bottom Line

I'm not going to quibble with the lawyer's advice about what the district can legally do with respect to keeping the tax-exempt status of the issued bonds. Those rules and regulations are completely irrelevant when it comes to the purposes for which Proposition 39 bond funds can be expended. It's laid out succinctly in the constitution.

The district took half a million dollars in Proposition 39 bond funds (more than a million in taxes) and used it to pay for operating costs, which is strictly prohibited by the constitution. It doesn't matter that some other law may also restrict spending. All the bond proceeds were acquired through a Proposition 39 bond election.

Stealing half a million dollars is a felony in anybody's book, wouldn't you agree?

Epilogue

The district clearly doesn't want to use its "own" money to pay for the scandal. One has to wonder, why isn't it suing those involved in the scandal to pay for the costs that they clearly caused? Here again, it's all about the culture of corruption of public officials and employees. They never have to pay for their actions, only the taxpayers do. If public officials and employees actually had to pay for their wrong-doing, they wouldn't take the jobs.

It's thanks to site members, that I get these actual documents. When I get something like this, I don't have to guess how the corruption works. It's laid out in black-and-white.

When you see highlighting in the documents below, hover overCriticalExample commentary. it to see the commentary.

August 19, 2016

Ms. Sheri Gamba
Chief Business Officer
West Contra Costa Unified School District
1108 Bissel Avenue
Richmond, CA 94801
RE: Bond Program Investigation Expenses

Dear Ms. Gamba:

You have asked whether available proceeds of the general obligation bonds issued by the District ("Bond Proceeds") may be used to pay District expenses in connection with the investigation regarding the District's bond program (the "Bond Program Investigation" and the associated expenses, the "Investigation Expenses") without adversely impacting the tax-exemption of the interest on the District's outstanding Bond Issues (as defined below).

The Bond Program Investigation was precipitated by allegations of various improprieties in connection with the management and administration of the capital projects funded with Bond Proceeds. The District has engaged a Certified Public Accounting and Business Consulting firm to review the allegations. The Bond Program Investigation is in Phase II which consists of two parts - a "Test of Controls" and a "Forensic Investigation" - and all of the Investigation Expenses that are addressed in this letter relate to Phase II of the Bond Program Investigation.

The Test of Controls aspect of the review is comprised of a review of the sufficiency of internal controls to ensure compliance with legal requirements and District policies for projects recently and currently ongoing (the "Recent and Ongoing Projects"). The Forensic Investigation aspect of the review is comprised of a review of the actual compliance with legal requirements and District policies for all Bond program projects, including Recent and Ongoing Projects and also past or completed projects (the "Past or Completed Projects"),

Unspent Bond Proceeds are available to pay Investigation Expenses from the District's (i) General Obligation Bonds, 2010 Election, 2015 Series C and General Obligation Bonds, 2012 Election, 2015 Series 8 (together, the "2015 Bond Issue") and (ii) General Obligation Bonds, 2012 Election, 2016 Series D, General Obligation Bonds, 2012 Election, 2016 Series C and General Obligation Refunding Bonds, 2016 Series A (together, the "2016 Bonds;" each of the 2015 Bond Issue and the 2016 Bond Issue is referred to as a "Bond Issue"). Each of the 2015 Bond Issue and the 2016 Bond Issue were issued pursuant to authorization provided by Measure D and the Bond Proceeds of each has been and is being used to fund the Recent and Ongoing Projects Costs related to Past and 4821-7759-1351.1 August 19, 2016 NIXON PEABODY LLP
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@NIXONPEABODYLLP Completed Projects generally were paid with District general obligation bonds issued pursuant to authorization provided by Measure J.

The District has a robust an active program of constructing and equipping new schools, improving, renovating and equipping existing schools and other capital projects, all funded in whole or in part with Bond Proceeds. The capital program has included and currently includes projects at a number of school sites. The administration and management of the capital program includes the subdivision of each project into task orders (each a "Task Order") for purposes of budgeting and tracking. Following a review of District's Task Orders, it has been determined that Bond Proceeds from each of the 2015 Bond Issue and the 2016 Bond Issue were used to pay all or a portion of the costs of 303 Task Orders, all related to the Recent and Ongoing Projects. You have also indicated that all or a portion of the costs of an additional 184 Task Orders relating to Past and Completed Projects were paid with Bond Proceeds from earlier bond issues but not with any proceeds of the 2015 Bond Issue and the 2016 Bond Issue. Thus, the Test of Controls' scope includes the 303 Task Orders related to the Recent and Ongoing Projects and the Forensic Investigation's scope includes the total 487 Task Orders.

RELEVANT LAW AND DISCUSSION

Under provisions of the Treasury Regulations applicable to tax-exempt bonds, costs which are not capital in nature, or "working capital costs," are subject to special limitations. Subject to certain exceptions, if such limits are not adhered to, a Bond Issue could be determined to fail to qualify for tax-exemption, retroactive to the date of issuance. In particular, unless it is established that the District has no other available funds (in, for example, the District's general fund) to pay working capital costs, Proceeds of a Bond Issue may not be used for or allocated to working capital costs. We believe that the Investigation Expenses do not constitute capital expendituresCriticalSo, for Proposition 39 purposes, the expenditure of bond funds is prohibited. But, if we can use a slight-of-hand, we can fool all of the people, all of the time. and therefore are working capital costs (i.e., such expenditures are not treated as a cost of a capital project under federal tax principles). In addition, we understand that the District is not treating the Investigation Expenses as capital expenditures for accounting purposes, including for depreciation purposes.

Accordingly, the Investigation Expenses may be paid with Bond Proceeds only if there is an applicable exceptionCriticalDoes Proposition 39 have any exceptions? Not a single one! to the above rule limiting the use of proceeds of tax-exempt bonds to pay working capital costs. One exception to this limitation relevant here is that Bond Proceeds may be used to pay:

"[working capital] costs . . . that do not exceed 5 percent of the sale proceeds of an issue and that are directly related to capital expenditures financed by the issue (e.g., initial operating expensesCriticalProposition 39 explicitly prohibits expenditures for operating expenses, initial or otherwise. But if we stick to tax law, we don't have to deal with big, bad Proposition 39. for a new capital project)" Treasury Regulation 1.148-6(d)(3)(ii)(A)(5).

For purposes of the above, the three series of bonds that comprise the 2016 Bond Issue are together treated as one "issue" of bonds. Similarly, the two series of bonds that comprise the 2015 Bond Issue are also treated as one "issue" of bonds that is completely separate from the 2016 Bond Issue. Accordingly, up to 5 percent of the Bond Proceeds of each of the 2015 Bond Issue and the 2016 Bond Issue may be used to pay working capital costs, so long as such working capital costs are directly related to the capital expenditures financed by each respective Bond Issue. I have advised that up to 5 percent of the Bond Proceeds of each respective Bond Issue may be used to pay 4821-7759-1351.1 August 19, 2016 NIXON PEABODY LLP
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@NIXONPEABODYLLP Investigation Expenses if and to the extent the Investigation Expenses directly relate to capital expenditures paid with Bond Proceeds of such Bond Issue.

DISCUSSION AND CONCLUSION

Based on information you have provided, Bond Proceeds from each of the 2015 Bond Issue and the 2016 Bond Issue were used to pay all or a portion of the costs of each of the 303 Task Orders identified above related to the Recent and Ongoing Projects. As noted, the scope of the Test of Controls will include a review of only matters related to the Recent and Ongoing Projects, solely comprised of such 303 Task Orders. Thus, up to 100 percent of the Test of Controls related Investigation Expenses are directly related to capital expenditures paid with proceeds of each of the 2015 Bond Issue and the 2016 Bond issue. Accordingly, up to 5 percent of the Bond Proceeds of each of the 2015 Bond Issue and the 2016 Bond Issue may be used to pay the Test of Controls related Investigation Expenses.

Based on information you have provided, Bond Proceeds of each of the 2015 Bond Issue and the 2016 Bond Issue were used to pay all or a portion of the 303 Task Orders related to the Recent and Ongoing Projects and none of the costs of the 384 Task Orders that relate to the Past and Completed Projects. Since none of the Bond Proceeds of the 2015 Bond Issue and the 2016 Bond Issue were used to pay any of costs of the 184 Task Orders for Fast and Completed Projects and the Forensic investigation will include a review of matters related to all 487 Task Orders, not more than 62.2 percent (303 plus 184 divided by the sum of such amounts) of the Task Orders which are the subject of the Forensic were paid with Bond Proceeds of each of the 2015 Bond Issue and the 2016 Bond Issue. Thus, up to 62.2 percent of the Forensic Investigation related Investigation Expenses are directly related to capital expenditures paid with proceeds of each of the 2015 Bond Issue and the 2016 Bond Issue. Accordingly, up to 5 percent of the Bond Proceeds of each of the 2015 Bond Issue and the 2016 Bond Issue may be used to pay up to 62.2 percent of the Forensic Investigation related Investigation Expenses.

It is important to note that not more than 5 percent of the Bond Proceeds of each of the 2015 Bond Issue and the 2016 Bond Issue may in the aggregate be used to pay Investigation Expenses (that is, taking into account both Test of Controls and Forensic Investigation related Investigation Expenses) and any other working capital costs. In addition, not more than 62.2 percent of the Forensic Investigation related Investigation Expenses may be paid with Bond Proceeds of both the 2015 Bond Issue and the 2016 Bond Issue (that is, the sum of Bond

Proceeds from the two Bond Issues so used may not exceed 62.2 percent of the Forensic Investigation related Investigation Expenses).

Please let me know if you have questions or concerns.

Sincerely,

/s/

Travis C. Gibbs Partner