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Thursday, October 26, 2017

FINANCIAL KINKS IN THE STATE AID FIREHOSE: Is The Grand Traverse Academy Skidding Toward Another Deficit?

A “kink” is defined as a difficulty or flaw that is likely to impede operation, as in a plan or system–this is a lot more than an itty, bitty kink!


“Budget woes strike GT Academy” 

In the last six minutes of the Grand Traverse Academy board’s September 22, 2017 meeting, Rehmann’s Steve Peacock announced to those in attendance that “starting in November, a State Aid intercept of $97,000, plus interest, for the State Aid loan” was set to begin.

Maybe Peacock should have used flash cards.  
Even with the nearly $895,000 intercept, the Grand Traverse Academy faces a $1,521,277 balloon payment on August 20, 2018.

The intercept, according to the terms of the school’s charter with Lake Superior State University, requires board approval:

Section 2.04. Academy Board Requests for Direct Intercept of State School Aid Payments. 
If the Academy Board directs that a portion of its State School Aid Payments be forwarded by the Fiscal Agent to a third party account for the payment of Academy debts and liabilities, the Academy shall submit to the Vice President of Finance for the University and to the University Charter School Office: (1) a copy of the Academy Board’s resolution authorizing the direct intercept of the State School Aid Payments; and (ii) a copy of a State School Aid Payment Agreement and Direction document that is in a form acceptable to the Fiscal Agent. 

How did this stunning reversal of fortune occur? 

Well, it wasn’t so sudden. 

This happened: during a “special” meeting on June 30, 2017, the Grand Traverse Academy board approved a “Resolution Authorizing A Line Of Credit For School Operations”. 
 
While the Traverse City charter school needed to obtain prior approval of the Michigan Finance Authority to secure the $2,330,000 line of credit required to pay its debt to Traverse City State Bank, it was not a “loan arrangement with the MFA”, as erroneously stated by the president of its board, Lesley Werth, in today’s Record-Eagle article. 

That’s not true, and Werth knows it—even though the Record-Eagle reporter apparently does not. 

In fact, the Michigan Treasury Department's spokesperson exclusively confirmed the following to me in an email on August 28, 2017, a fact previously published on this blog: “Grand Traverse Academy hired a financial advisor who worked with the academy and PNC Bank to develop a customized solution for their School Aid Note. To date, no money has been provided to Grand Traverse Academy. We expect final credit approval, paperwork and processing in two to three weeks.” 

If you’d only read today’s story, and a previous Traverse City Record-Eagle article titled “Outlook improves at GTA”, you might assume that the Michigan Finance Authority was helping the Grand Traverse Academy arrange state aid note loan financing to pave the school's path out of debt.

But you'd be wrong. 

Let’s get back to the truth. 

And then this happened: the Grand Traverse Academy board refinanced $2.3 million in short-term debt it owed to Traverse City State Bank with an agreement that included a stunning provision requiring the interception of nearly $895,000 of school aid funds away from the Grand Traverse Academy during this current year and transmitted directly to bondholders for debt-service payments — funding that cannot be redirected to any other budget line item.

Again, the $2.3 million debt to Traverse City State Bank was not a “decade-old debt”, as the Record-Eagle continues to insist. 

It is instead another brick in the wall—part of the Grand Traverse Academy's ten-year cycle of short-term borrowing, and retiring debt with subsequent borrowing. 

Beginning with the fiscal year ending June 30, 2009, the Grand Traverse Academy's former manager, convicted felon and current resident of Duluth FPC, Steven Ingersoll, began to borrow massive sums through state aid note loans on behalf of the school, spurred by the impact his embezzlement was beginning to have on the Academy's throttled cash flow. 

Ingersoll established a pernicious pattern the board remains locked into today: an addictive reliance on balloon payments, higher interest refinancing and new notes every year. 

For example, the Academy had two short-term notes payable at the end of the fiscal year ending June 30, 2009 totaling $3.2 million dollars. 

At the end of June 2009, there was still $2,000,000 yet to be paid. 

By the end of the fiscal year ending June 30, 2011, the Academy had two short-term notes totaling $5,587,294 (with a $5,537,219 principal and $50,076 accrued interest). 

Starting in May of 2011, the State of Michigan began taking payments for a $2.0 million State Aid Anticipation Note with the Michigan Finance Authority directly out of state aid payments prior to distributing the remaining funds through Lake Superior State University and Wells Fargo. 

Although the Academy paid off a remaining $600,000 balance to the Traverse City State Bank and $3,400,000 due to charter school finance company Robert W. Baird & Co., the Academy borrowed an additional $6,400,000 in State Aid Anticipation Notes during the year from the Michigan Finance Authority, leaving the Academy with an ending balance of $5,537,218 at June 30, 2011 — nearly identical to the amount it owed at the beginning of that year. 

In the fiscal year ending June 30, 2012, the Academy began the year with a short-term debt balance of $5,537,218. 

The Academy paid off two remaining notes from the previous fiscal year with a new short-term note for $4,600,000 million in August 2011. 

The balance at the end of June 30, 2012 was $4,208,719. 

Between 2007 and 2014, the Grand Traverse Academy's board of directors enabled and covered up Steven Ingersoll's siphoning of millions from the Traverse City charter school, hastening its descent into a nearly untenable financial position. 

But this dire financial situation did not sneak up on the Grand Traverse Academy's board of directors, it was created by their actions. 

It was further exacerbated by the board's decision in 2014 not to seek recovery of millions of dollars looted from Ingersoll, instead writing it off to “bad debt”. 

It's like the guy who goes to his bank and says he just wants to borrow enough money to get out of debt. 

Instead of a pattern of subsequent borrowing to pay off the previous year's obligations, the school should have been building cash reserves instead of relying on larger and larger loans. 

Who believes board members didn't notice that pattern, especially when those members approved all that short-term borrowing activity? 

In today’s Record-Eagle story, Steve Peacock referred to the Grand Traverse Academy’s Series 2007 $16.2 million bond, stating the bond issue requires the school to keep its general fund balance at about $700,000. 


Those reserves – pegged to rise this year to $191,000 – should grow or officials risk bondholders demanding new management, he said. 

Peacock was apparently referring to the Unreserved General Fund balance, which was $18,112.39 at the fiscal year ending June 30, 2017. 

“Two or three years from now, the school is going to be debt free and we’ll have a heck of a lot more funding available for discretionary spending,” Peacock asserted. 

Don’t count on it, Steve.  

As you can see below, debt service for the Grand Traverse Academy's Series 2007 $16.2 million bond runs through November 1, 2036.


The Grand Traverse Academy's reliance on short-term debt?

It all started years ago. 

Aided by the Traverse City charter school's board of directors, who knew definitively after a March 20, 2013 meeting with two Thrun law firm attorneys, former superintendent Kaye Mentley and then-president Mark Noss that Ingersoll owed the school at least $3.5 million, the Academy’s 2013 audit revealed the charter school utilized agile financial alchemy, transforming its multi-million dollar Ingersoll-generated “receivable” into a “prepaid expense” — camouflaging Ingersoll's misappropriation with the guise of an asset. 

The Grand Traverse Academy Board 2007-2016 made misleading public statements as the Michigan charter school’s financial condition was deteriorating due to the fraudulent conveyance of approximately $5.0 million from the school by its former manager, Smart Schools Management, Inc.’s Steven Ingersoll. 

In addition, financial information available to municipal bond investors was either incomplete or outdated, as the Grand Traverse Academy board provided fraudulent financial statements as part of its required continuing securities disclosure documents. 

Those statements concealed Ingersoll’s misappropriation by disguising his accumulating debt to the charter school variously as “accounts receivable”, “related party receivables”, “prepaid expenses” or “lease receivable”. 

However, if you strip away the artifice of those financial tricks, including manipulative accounting practices, and material misrepresentations to skirt covenant violations and hide catastrophic losses from bondholders and creditors, you're left with today's deeply negative and rapidly deteriorating financial position. 

On March 2, 2007, Steven Ingersoll signed a $16.2 million Public School Academy Revenue and Refunding Bond on behalf of its issuer, the Grand Traverse Academy. Ingersoll’s company, Smart Schools Management, Inc., had been contracted by the academy’s Board of Directors to handle its daily operations since the academy's inception in the fall of 2000. 

However, when Ingersoll signed the bond contract, he omitted information about false and misleading public statements he and the Board of Directors had already made (and continued to make for at least seven years) regarding the Grand Traverse Academy’s financial condition. 

The academy’s financial situation had already begun to deteriorate due to Ingersoll’s misappropriation of funds, an amount estimated at nearly $5.0 million. The Grand Traverse Academy’s financial misstatements and omissions were not the result of an isolated incident, but were recurrent and stretched from one fiscal year into the next. 

At the start of each fiscal year, (beginning July 1, 2007 and continuing for six years through the fiscal year ending June 30, 2013), Grand Traverse Academy (GTA) manager Steven Ingersoll withdrew his entire annual Smart Schools Management, Inc. fee from the Traverse City, Michigan charter school’s bank account before it had been earned—and before he was contractually entitled to receive it. 

Although ostensibly based on a percentage of the GTA board’s approved preliminary budget figures, Ingersoll’s management fee was necessarily “adjusted downward” after actual budgets were calculated at the end of each year. 

Ingersoll booked the overpayment on the GTA’s balance sheet as either “accounts receivable” or a “prepaid expense”, claiming them as “assets”, thereby concealing the school’s shaky financial condition. 

In addition, Ingersoll utilized a “lease receivable”, a wildly-fluctuating amount purporting to be “facility lease payments”, to avoid showing a financial deficit. 

Those annual “lease” amounts ranged from $0 to $800,000 for two 12’ x 12’ rooms. 

The “prepaid expense” scheme was publicly supported by then board president (later head of the Academy’s new management company) Mark Noss, who described it in a September 17, 2014 Interlochen Public Radio interview: “There were times when the resources were just not there. So Smart Schools basically pledged or rebated that money back, saying ‘at some point in time we will repay what we’re calling a prepaid expense.’” 

However, Ingersoll never really repaid the difference between the amount he'd advanced himself (“what we’re calling a prepaid expense”) and the actual management fee he should have received. 

So how did the receivable grow from $538,864 on June 30, 2007 to $3,551,328 on June 30, 2012 if Ingersoll, as he’d claimed in multiple financial documents to the GTA board, booked each year’s fee overpayment as a receivable and paid it off at the beginning of the next fiscal year? 

Simple: after Ingersoll had paid the previous year's receivable balance using Michigan state aid money provided to the Grand Traverse Academy, he transferred that money back from the Academy’s bank account to one of his Smart Schools accounts, creating a new, and even larger, receivable balance. 

The Grand Traverse Academy carried on its books large amounts classified either as “amounts receivable from sources other than governmental units”, “related party receivables” or “prepaid expenses” beginning as far back as the fiscal years ending June 30, 2005 ($126,649) and June 30, 2006 ($691,703). 

In its 2008 audit, the Grand Traverse Academy revealed it was owed $938,481 as an “accounts receivable”. 

In its 2009 audit, the Grand Traverse Academy revealed it was owed $3,049,957 as an “accounts receivable”. 

In its 2010 audit, the Grand Traverse Academy revealed it was owed $2,715,251, classified as "amounts receivable from sources other than governmental units". 

The 2011 audit revealed that the Grand Traverse Academy was owed $2,500,000 from "related parties", the first use of that classification. 

The "related party receivable" amount, which ballooned to well over $3.5 million by the June 30, 2012 audit, was solely attributable to Steven Ingersoll. 

Ingersoll ultimately admitted he’d utilized an “accounts receivable” financial statement fraud scheme as cover for his diversion of funds from the Grand Traverse Academy — under direct examination on December 9, 2015 by Assistant U. S. Attorney Janet Parker during his sentencing hearing.

“Some of the prior management have done them no favors,” said GTA Attorney Jim Crowley.

And the Grand Traverse Academy board let them get away.

1 comment:

  1. As always, your research and reporting are outstanding. Thank you for the service you are doing especially for the Traverse City and Bay City communities. Hope you get positively rewarded for all that work.

    ReplyDelete