Dive Brief:

• The Sweetwater Union High School District and its former CFO, Karen Michel, settled claims that they misled investors in a $28 million municipal bond offering, the Securities and Exchange Commission says. 
• The SEC alleged that Michel and the Chula Vista, Calif.-based school district, in San Diego County, gave investors misleading budget projections and hid the fact that its finances "were severely strained." 
• Michel and the public school district said the district would conclude 2021 with $19.5 million in its general fund, the SEC alleges, but later revealed that the school had overspent its budget by $28 million, resulting in a year-end deficit of $7.2 million.

Dive Insight:

“The misleading budget projections were primarily the result of Sweetwater failing to accurately budget for a 3.75% pay raise approved shortly before the beginning of the 2018 fiscal year,” the SEC said. “Sweetwater failed to accurately budget for these pay raises in its 2018 budget, and, instead, projected expenses nearly identical to the expenses incurred in the 2017 fiscal year.”

Sweetwater’s mid-year budget monitoring reports showed its actual expenses trended significantly higher than its budgeted projections, the SEC said. “Despite this, Sweetwater made no effort to bring its budget into line with actual expenses.” Instead, it continued using “stale budget projections in its interim budget reports.”

The district used its stale projections when offering municipal bonds that would be used to fund future projects, the SEC alleged in its complaint against Michel. 

Michel knew projections were untenable, but included them in the bond offering documents anyway and further provided those "deceptive budget figures" to a credit rating agency in connection with the bond offering, according to the SEC's complaint.

Michel started work in the school district’s Financial Services Department in 1996, the SEC wrote, and served as its CFO and chief business officer from 2014 until her 2018 retirement. 

As CFO, Michel was responsible for the district’s bond, business and finance programs, and was authorized to execute all required documents on the district’s behalf.

“Michel or others acting at her direction were primarily responsible for providing Sweetwater’s financial information in support of the bond offering,” the SEC said. Between February and April 2018, the district “repeatedly provided misleading interim budget projections to the credit rating agency and potential bond investors.”

After Michel retired, her replacement realized the district’s substantial deficit and budget discrepancies, the SEC said.

"As the order finds, Sweetwater and Michel presented stale and misleading financial information as current and accurate," head of the SEC’s Public Finance Abuse Unit, LeeAnn Gaunt, said Thursday. "The SEC will continue to address deceptive conduct that prevents municipal bond investors from getting an accurate picture of the financial risks of their investments."

Without admitting to or denying the allegations, Michel agreed to settle with the SEC, to refrain from participating in any future municipal securities offerings and to pay a $28,000 penalty. 

Sweetwater also agreed to settle, and also without admitting to or denying any of the findings, consented to the entry of an SEC order requiring it to engage an independent consultant “to evaluate its policies and procedures related to its municipal securities disclosures.”

"This settlement resolves all outstanding SEC claims against the district and represents another positive step in the district’s ongoing remedial efforts to continuously evaluate and improve its fiscal health,” Sweetwater said in a statement obtained by the San Diego Union-Tribune. “The district looks forward to implementing the improvements and changes outlined in the SEC’s order. It will continue to take steps to ensure it provides accurate disclosures and information to the public.”

"School districts oftentimes place their employees in harm's way by expecting them to understand the complexities of bond offerings when they, the districts, should recognize that a higher level of financial expertise may be required than is available of in-house employees," Michel’s attorney, Jan Ronis, told Law360. "There was negligence at multiple levels in the bond issuance process, including up to and at the board of trustees level."