The Crosby Independent School District in Texas and its former CFO settled charges they misled investors in a $20 million bond issuance by overstating the agency’s financial health, the Securities and Exchange Commission (SEC) says. The former CFO, Carla Merka, was penalized $30,000 for her role without admitting or denying the findings.
The school district issued the bonds in 2018 to cover costs from previous construction work and to fund new projects, but it painted too rosy of a picture of its financial strength in the 2017 audited financial statements that were used to support the bond issuance, the SEC says.
The statements showed the agency with $5.4 million in general fund reserves but it failed to report it owed $7.9 million for construction and $3.8 million for salaries.
“Crosby knew that its payroll and construction liabilities were higher than the amounts recorded in its fiscal year 2017 audited financial statements,” the SEC said in its complaint.
Merka never determined the amount the agency owed or informed its auditor that the 2017 payroll and construction liabilities were understated, the SEC says.
The agency’s financial troubles stemmed from capital projects it funded in 2013 using $86.5 million in municipal bond proceeds. Project enhancements inflated the costs, causing the agency to exhaust its bond proceeds by 2016. That left Crosby’s general fund as the only source for approximately $12 million in commitments.
“Crosby and Merka knew that the District’s General Fund lacked sufficient funds to cover the $12 million,” the SEC said.
To help remedy the problem, the agency changed its fiscal year-end date from August 31 to June 30 with the aim of increasing its general fund reserves, and issued the new municipal bonds.
Changing the end date caused more problems than it solved, by increasing payroll liability for teacher salaries.
“Merka knew that the payroll liability was understated, but still signed a management representation letter falsely asserting that, among other things, the fiscal year 2017 financial statements were presented in accordance with GAAP,” the SEC said.
Compounding the problem, Merka didn’t tell the auditor the date change resulted in not all of the agency’s contract employees being paid in full. “Merka never corrected this misunderstanding,” the SEC said.
As a result of its actions, the agency’s $20 million in bonds were issued on the basis of bad information.
“Crosby knew that its fiscal year 2017 financial statements were false and misleading, yet submitted them to the bond financing team for inclusion in the offering documents,” the SEC said.
In addition to charging the agency and penalizing the CFO, the SEC suspended the auditor, Shelby Lackey, for not following procedures to verify the accuracy of the payroll and construction liability information she was provided.
"Crosby and Merka misled municipal bond investors regarding the truth of Crosby’s financial health, and Shelby Lackey’s deficient auditing practices further exposed investors to harm," said LeeAnn Gaunt, enforcement division chief in the SEC’s public finance abuse unit.
