PENN HILLS SCHOOLS FINANCIAL CRISIS
Cost overruns
Despite recommendations to raise taxes and cut costs to pay for the new projects, the board instead relied on cost-savings estimates based on consolidating its school buildings, according to the report.
In 2009, the board voted to borrow more than $130 million by issuing bonds, increasing its debt service to $5.2 million a year.
The construction manager, Turner Construction, emphasized that the costs could not increase if the financing was to work. But despite Turner Construction’s warnings, AI continued to develop plans for larger buildings that were over budget, the report said.
In April 2012, AI claimed its designs did not include the cost of fields and athletic facilities, although the board and community believed they did.
The district determined it would need to find $2 million more to pay for the fields. “Despite these financial hurdles, Architectural Innovations and the board continued to overspend on the construction projects,” the grand jury report said.
Those expenditures, in turn, drove up AI’s fees, which were based on a percentage of total costs. Design flourishes at the high school included two-story glass windows, spiral staircases, a rounded facade, a $1 million canopy, chandeliers, skylights, plaster walls and an auxiliary gym in addition to the main gym.
Furthermore, AI was unwilling to compromise on the types of materials used to build the schools, according to the report. At nearly every juncture, the board signed off on using the highest quality materials — like the Italian tile in the elementary school’s foyer — even as its ability to pay became increasingly questionable, the report said.
AI also insisted on a white roof for the high school instead of a cheaper black one, so that the building would look like a bird from above. “While these elements may make the buildings showpieces, they do nothing to benefit the education of students,” the report said.
The board had the option to use furniture and fixtures from the old buildings or to borrow to buy new. It chose the latter, according to the report.
In September 2012, the board issued an additional $27.2 million in bonds to cover prior debt and finish the construction projects. The district, however, relied on the state Intercept Program. Under that program, if a district is unable to pay debt service, the state Department of Education could take it from state subsidies — essentially reducing a district’s state appropriations, much of which goes for education.
In effect, the district was “prioritizing the payment to bondholders over other expenses necessary to provide the students with their constitutional right to an education,” the grand jury found.
The state never questioned the borrowing, the report said. A Department of Education spokesman said Tuesday that agency officials had not yet read the report and could not comment.
Many of the school board members who testified before the grand jury demonstrated a lack of understanding of the district’s budget and the debt the district had incurred, the report said. It cites an exchange with former board member Robert Hudak, who underestimated the size of the budget he helped oversee by tens of millions of dollars.
When asked in front of the grand jury to estimate how much taxpayer money he oversaw during his decade on the board, Mr. Hudak testified that it was a “large amount,” then a “couple million,” then “8 million.”
“How about 80, 90 million maybe?” he was asked, referring to the district’s annual budget in recent years, the report said.
“Could be,” Mr. Hudak said, according to the report.
Dire challenges
As the district’s financial health declined, an independent auditor found that the problem was, in fact, far worse than it had appeared to board members and district officials.
During an independent audit of financial statements for fiscal year 2013, the auditor found that the district had improperly reported interest payments during the construction period. As a result, the general fund balance was overstated by a cumulative $11 million between fiscal years 2010 and 2012.
“It is important to note that no money was missing from the district,” the report said. “Rather, the $11 million error was the result of the improper recording and reporting of interest expense transactions.”
In 2013, Penn Hills contacted the state Department of Education for help managing its budget. A consultant recommended a number of measures to address a $6.5 million deficit, including budget cuts and a tax hike.
But after consultant Patrick Sobol left his assignment believing the fiscal year 2015 budget would be balanced, the district backed off the measures that would have made it solvent, the grand jury said.
Certain board members viewed the recommended measures as “too extreme.” Although Mr. Sobol stressed that a tax increase was a “necessity,” the board decided not to do so, the grand jury said. Board members also refused to cut certain classes of teachers against his recommendation.
“It appeared that, despite a $6.5 million deficit, the board still did not recognize the severity of the district’s financial situation,” the grand jury report said.
Furloughed teachers were later rehired and the board made other questionable decisions, the report noted.
In one case, the district added a bus route for a board member’s relative so that “the student would not have to walk too far,” the grand jury report said. This child was the only student on the route, the grand jury said.
Although Mr. Liberto continued to recommend furloughs, the board refused, according to the report. One board member testified that Mr. Liberto risked being fired if he continued to insist on the cuts. He was fired in March 2015.
Mr. Liberto said Tuesday that the “report speaks for itself” and shows that the board ignored him when he pushed to keep costs in line. “It’s a shame that the people of Penn Hills are going to suffer now because of the improprieties of current and former board members,” he said.
In April 2015, unable to pay its bills, Penn Hills petitioned Allegheny County Common Pleas Court for permission to incur even more debt. PNC Bank, the district’s longtime lender, agreed to provide a shortterm loan of $12 million with the stipulation that it be the first paid when tax revenues were collected, according to the report.
In its summary statement, the grand jury noted that board decisions could have far-reaching consequences.
“The reckless financial decisions made by the Penn Hills School Board, school administrators, and their advisers over the past decade plunged the district into an accelerating downward financial spiral that has resulted in the District’s economic ruin,” the report said. “The district’s taxpayers may face a future of tax increases accompanied by loss of property value, while the district’s students face vast uncertainty regarding their education.”