Auditors blame poor oversight at Crosby ISD
Financial missteps could jeopardize state and federal aid, district’s viability
Former Crosby ISD administrators failed to keep track of construction spending and omitted nearly $8 million in cost overruns from some 2017 financial statements, according to an audit of the district still struggling with fiscal issues that led to the layoffs of more than 100 staff and teachers last year.
In an annual financial audit compiled for the district, accountants with Weaver and Tidwell LLP wrote that the former administrators did not monitor spending on construction projects, failed to submit required data to the Texas Education Agency and failed to notify the school board of millions of dollars’ worth of construction payments. The district’s board also rubberstamped at least one budget that showed administrators planned to spend $5.5 million more than the district would receive in revenue even though the district did not have enough money in its reserve funds to cover that deficit, according to the auditors. The result of those and other missteps could jeopardize the district’s federal and state funding, and prompted the auditors to question the financial viability of the northeast Houston-area district, which serves more than 6,150 students.
“We believe that the following events or conditions identified during the course of the audit raise substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time,” the auditors wrote.
District spokeswoman Viviana Killion said Superintendent Scott Davis and other administrators would not comment on the audit until it is presented to the board of trustees at a meeting Tuesday.
The audit provides the clearest details yet about how the district came to the brink of insolvency, which led administrators to declare an official financial emergency last October and cut more than 100 positions, including laying off more than 34 teachers and contract workers that month.
Questions about Crosby ISD’s finances first were raised after the abrupt departure of former superintendent Keith Moore in January 2018 and former chief financial officer Carla Merka last June. Current CFO Lesa Jones said she found a series of “cash-flow” issues shortly after coming to the district last June.
The auditors identified two primary issues: poor oversight and payment practices related to the district’s 2013 bond, and shoddy accounting that led to excessive spending in previous budgets. ‘Significant rise’
Auditors said construction costs relating to an $86.5 million bond approved by voters in 2013 eventually swelled by $16.1 million more than was set aside. According to the audit, those costs were not monitored during the course of construction, and no one made sure the district had enough cash on hand to cover the increased costs, which the former administration blamed on “a significant rise in construction costs.” Ultimately, they wrote, those cost overruns exceeded what was available in the district’s general fund.
Moore also failed to notify trustees or others of changes and additions to the scope and cost of construction contracts and did not negotiate or determine the true costs of the changes in advance, the auditors wrote. Additionally, district officials did not log those additional expenses until they began to pay them off, rather than noting them when they were incurred, which the auditors said could constitute “fraudulent financial reporting.”
To avoid “a perception of financial mismanagement or poor financial condition,” the former district administrators delayed recognizing those costs until they could raise more money by issuing a bond in 2017, the auditors said.
Crosby ISD’s board of trustees approved a resolution in July 2017 authorizing district officials to cover the cost overruns with the proceeds from a future bond issue. Voters approved a $109.5 million bond that November.
The district set aside $10.85 million of that bond issue for the additional expenses related to the 2013 bond.
It ended up being not enough. From April until June 2018, auditors said, the district transferred a total of $5.65 million of additional 2017 bond proceeds from its capital projects fund to the general fund to cover operational and payroll expenditures. The current administration had to dip into that bond money again last July to cover payroll expenses, bringing the total amount the district’s general fund must reimburse the capital projects fund to $7.64 million as of July 31, 2018.
A person who answered the telephone at Moore’s home Monday evening said he would not comment for this story.
David Kwok, an assistant professor at the University of Houston’s Law Center who specializes in white-collar crime, said those found responsible for “fraudulent financial reporting” could face criminal and civil penalties. To prove there was fraud in a general sense, Kwok said there must be evidence that someone knew what they were recording was false and that it caused someone to lose money.
Based on a brief review of the audit, and without a deep understanding of the Texas Education Code’s statutes related to finances, Kwok said the former administrators’ actions appear to be violations of regulations and policies.
“How early did people know that these cost overruns were occurring, and what did they do about it?” Kwok said. “If they knew at the time the 2013 bonds were issued that there was no way we can get this done with this money, that’s more suspect. The later people learn about cost overruns, the less fraud-like it looks, and it begins to look more negligent.”
At the same time, former administrators presented budgets to the board of trustees that called for spending more than the district would make in revenues and overestimated those revenues by millions of dollars. For example, auditors said Crosby’s board approved a 2017-2018 budget that included spending $5.5 million more than the district would bring in, and projected $3.6 million more in revenues than the district ended up collecting. There was not enough money in the district’s reserve funds to cover the shortfall.
Despite the problems noted by auditors and current Crosby ISD officials, Tiger Hanner, an attorney representing Merka, said no one from the district or the auditing firm has reached out to the former district CFO to ask about the district’s financial issues or actions taken by the previous administration.
“They have never spoken to her or asked for information,” Hanner said. “She has been excluded from this investigation from the start, which is obviously very frustrating. She did everything by the books.” ‘We need help’
The outcome of any investigation, however, may do little to restore trust among some in the community. Paul Grantham, whose two children graduated from Crosby schools and currently has two grandchildren enrolled in the district, said the financial missteps were so egregious and Crosby ISD’s financial stability so shaken that the Texas Education Agency should merge the district with another nearby.
“After this event, and with the state of the economy in the Crosby area, we just cannot afford this district,” Grantham said. “We need help. I’d rather see us do it in an agreed merger than have TEA come in. But if the board refuses to reach out, then I am for TEA coming in and doing a top-to-bottom investigation and clean up this mess, even if that means some folks go to jail.”