BISD'S BOND COUNSEL, FINANCIAL ADVISERS, AND FULLER'S ROLE IN $25.9 MILLION BOND FIASCO EYED, OTHER FULLER DEALS, ACTIONS EXAMINED

Part III

(On September 2011 the trustees agreed to hire the Dallas forensic auditing firm of Defenbaugh & Associates to complete a forensic audit within 120 days. The audit covered the 2008-2009, 2009-2010 and 2010-2011 school years and cost $250,000. In this part, the role of BISD's financial consultants and former CFO Tony Fuller in a bungled $25 million bond issue is examined. Fuller's role in other transactions also caught the eye of the auditors.)

1. $25 million bond investigation

FINDINGS AND RECOMMENDATIONS

By Juan Montoya

Among some of the findings uncovered by the forensic audit, perhaps none is more damning than the failure of the BISD's bond counsel, financial consultants and Fuller in the issuance of $25.9 million in Qualified School Construction Bonds (QSCB) under the federal Instructional Facilities Allotment (IFA)in 2010 .

Board members and even former Superintendent Brett Springston were told at the time that the state would consider the entire debt service with federal tax credits which would make the bond "free money."

Yet, the auditors found out that as early as March 20, 2010 – months before the board followed the advice of bond counsel Fulbright & Jarwoski and financial advisers Estrada Hinojosa & Company Inc.

and issued the debt in December 7 – that counsel, the advisers and Fuller were aware that the Texas Education Agency may change the rules on how the allotment would be determined, saddling the district with more than $9 million in debt instead.

The Forensic Audit Staff reviewed numerous documents and conducted interviews to determine if (they) were negligent in their performance of their fiduciary duties to the (board) by not fully disclosing the details relating to the IFA prior to $25.9 million in (bonds) Series 2010.

In March 2010, the State Funding Division of the TEA notified BISD Financial Advisor Estrada Hinojosa & Company that the rules may change regarding those bonds that receive tax credit.

From this point, until after the (bonds) were issued and sold, the forensic audit could not find any written documents where the financial advisor communicated to the district the possibility that the rules may change based on the calculations of debt service due to the effect of receiving the federal subsidy.

The board authorized the issuance Dec. 7, 2010...and the bonds were sold Dec. 22. A little over two weeks later, on Jan. 6, 2011, Estrada Hinojosa & Company was contacted by the TEA and they were told the debt service schedules submitted with the four IFA applications were incorrect because they did not deduct the federal subsidy from the debt service requirement on the bonds.

So, instead of a minimal payment, or none at all as they had been promised, the board members were told that t

he district's local share will be a approximately $507,068 a year which over the 18-year term of the bonds will cost the district $9,127,216 to retire.

Neither bond counsel nor Estrada Hinojosa & Company told the board members that the TEA might change their policy. The Forensic Audit Staff could find no evidence they attempted to find out before the bonds were issued and sold.

However, CFO Fuller was told by the financial advisor that TEA might change the way the debt service is funded to only the "net" service being eligible for funding. Fuller advised Forensic Audit Staff that he wishes, in hindsight, he had informed the board.

The staff recommends that the "trustees seek legal advice from an outside legal counsel who has experience in filing legal suits and litigation to explore whether or not the district should filea lawsuit against the financial advisory and/or the bond counsel.

(We) also recommend the board of trustees and superintendent review the facts regarding (Fuller)'s dereliction of duty in that he did not fulfill his obligation to inform (them) that the state's rules might change which was critical information needed to vote on the issuance of $25.9 million in bonds.

2. Real property purchase without a purchase order: 19.239 acres out of 308.92 acres tract

FINDINGS AND RECOMMENDATIONS

In September 2009, the BISD purchased land in a transaction totaling $1,926,535 without a purchase order beingith policies and state law but failed to issue a purchase order on a transaction over $40,000, which is stipulated by BISD policy. issued. The district made an initial earnest money deposit of $2,500 in accordance w

(Fuller) was at the time Finance Director and cleared the cash payment which was also a violation of policy. Interim Superintendent Springston and Facilities Administrator Oscar Tapia should have "imme

diately" contacted then CFO Robert Ruiz and advised him of his violation of policy. This is not the only time that real property has been purchased without the issuance of a purchase order.

The Forensic Audit Staff recommended that Ruiz, now administrator for payroll for BISD should be counseled regarding his actions at that time and that a memorandum should be placed in his file documenting this significant oversight.

Because of Fuller's performance in the administration of Fixed Assets "unaccountable" items totaling some $6 million in missing property where he stated before at least six BISD administrators that the amount "was not material" compared to the $500 million district budget, his

performance in the "inconvenient" issuance of three large checks that resulted in the bouncing of at least 134 other smaller checks, and the transfer of funds from one account to another contrary to board directives, the Forensic Audit Staff concluded Fuller was "indifferent and nonchalant" toward his duties.

"Forensic Audit Staff arrived at the opinion that Mr. Fuller did not possess the competencies in both faculties and capabilities necessary for the position of BISD CFO. Mr. Fuller should have never been named to that position."

After stating that the supporting documents had been turned over to the appropriate law enforcement agencies for their prosecutorial discretion, the Forensic Staff stated that "(we) recommend strong administrative action taken on Fred Anthony Fuller with consideration up to termination."