Inter-Departmental Correspondence

County Counsel



June 8, 2009


June 16, 2009




4/5 vote required



Honorable Board of Supervisors


Michael P. Murphy, County Counsel



Resolution Authorizing up to $2.5 Million to La Honda-Pescadero Unified School District to Supplement Bond Funds for School Repair and Renovation



Resolution Authorizing Transfer in Amount of $2.5 Million from Non-Departmental Reserves to Loan to Other Funds/Agencies to Assist La Honda-Pescadero Unified School District with School Repair and Renovation




Adopt a resolution authorizing the County Manager to negotiate and enter into agreements with the La Honda-Pescadero Unified School District for an advancement of funds to the District in the amount of up to $2,500,000 to be reimbursed from anticipated proceeds from future bond sales.


Adopt a resolution transferring funds in the amount of $2,500,000 from Non-Departmental Reserves to Loan to Other Funds/Agencies for the purpose of assisting the La Honda-Pescadero Unified School District to pay for work already done at its school sites and to complete essential construction at its school sites (4/5 vote required).



Commitment: Responsive, effective and collaborative government.

Goal(s): County and local governments effectively communicate, collaborate and develop strategic approaches to issues affecting the entire County.



This matter is being brought to the Board through this office as a request from the La Honda-Pescadero Unified School District and County Superintendent of Schools.


In 2006, residents of the La Honda-Pescadero Unified School District (“District”) approved Bond Measure I authorizing up to $15 million of bonds to renovate the schools of the District. The main purposes of the bond funds are to repair and renovate La Honda Elementary School, Pescadero Elementary School, and construct a new facility for Pescadero High School. As of June 2009, the District has issued two series of bonds with proceeds of approximately $5.85 million. There is a balance of $2.3 million remaining from those proceeds. This balance is insufficient for the District to meet its financial obligations.


The District’s financial problems stem from alleged fraudulent management of the construction projects by the Zahn Group, the contract project manager hired by the District to oversee the program. As a result of alleged false representations made by the Zahn Group, indicating that $3.2 million in State facility hardship grant funds had been secured (when they in fact had not), the District entered into a number of construction agreements for several “rush” projects which were to be paid from the non-existent grant funds. These projects, which represent a portion of the overall plan for repair and renovation in the District,were substantially completed between June and August 2008.


When the truth about the grant funds became known in September 2008, the District brought a halt to the construction, terminated the project manager (and reported his alleged fraudulent activities to the District Attorney), retained outside legal counsel to seek civil relief against the Zahn Group and its principals, and hired a new construction manager (Greystone West) to review the contracts and completed work in order to determine a course of action with regard to construction claims that have been made, or are expected to be made, by contractors hired by the District.


On April 13, 2009, the County Superintendent of Schools, exercising her authority as provided by the California Education Code, assumed financial oversight of the District, and appointed Steven Waterman, a former school superintendent of the Bayshore and Brisbane School Districts, as the District’s financial advisor. Mr. Waterman has helped the District to make cost reductions in the general fund (exclusive of construction costs) to bring it into a positive balance for 2009-2010 and the following fiscal year. Mr. Waterman has also been working with the District’s new construction manager to review the construction claims, and to develop an approach to resolving them through negotiations with the contractors.


As a result of this review, the District has determined that it needs approximately $2.5 million to supplement its bond fund balance of $2.3 million in order to pay off its creditors and complete the essential, remaining projects. The remaining projects to be completed are limited to those that impact student health and safety and those required by agencies such as the Division of the State Architect, the County Planning and Building Department, and the State Fire Marshal. The District believes that if these projects are not completed before school opens in August 2009, there is the possibility that one or more schools could be closed.


The District and the County Superintendent of Schools have approached the County seeking assistance for the District. The proposal from the District would require that any funds loaned to the District by the County be paid back from any subsequent bond issuances. All funds loaned to the District would be expended under the supervision of the County Superintendent of Schools.



Although the District has $9.15 million in remaining bonding capacity under Measure I, limitations on allowable debt would preclude any additional sale of bonds for at least 7 to 10 years, according to estimates given by the District’s bond consultants and bond counsel. Without financial assistance, the District faces the prospect of multiple lawsuits from contractors who performed work, that could leave the District legally obligated (but financially unable) to meet its commitments. Options for the District would be (1) state receivership under the provisions of Education Code 41320 et seq., which requires the appointment of a state trustee to oversee and manage the District back to economic health and (2) bankruptcy under Chapter 9. After reviewing the limited funding options available, County Counsel has determined that a “lease-lease back” loan, which is authorized by California Education Code 17456, is the appropriate legal vehicle for the County to provide funds to the District. This funding mechanism, which is unique to school districts, would require the District to lease the Pescadero High School property to the County for the amount of the assistance required, with a “lease back” to the District providing for payment of a nominal amount every year. When the District sells its next series of bonds, the District would be required to make a final payment to the County of the remaining balance of the loan. The loan would be secured by future bond proceeds, i.e. the County would have the first right to the proceeds from any future bond issuances by the District. All funds loaned by the County to the District will be used to pay for capital projects as approved by the District’s voters in Bond Measure I.


The District has submitted a schedule which sets forth the amounts it anticipates it needs to resolve all outstanding claims and to complete essential projects. The District believes it needs approximately $4,693,368.75. However, the amount of remaining bond funding available to pay these contracts is $2,300,000, leaving a balance of $2,393,368.75 needed to meet these obligations. The District is requesting that loan funds up to $2.5 million be made available to cover these expenses as well as any unanticipated construction-related expenses that could arise. It should be noted that these calculations are based on a “worst case” scenario, assuming no compromise of claims. It is possible that the District will not need the full $2.5 million.


As further background and information, it should be noted that the District was sued recently by a resident to stop payments to contractors and to require the District to fully staff the Bond Oversight Committee.



If the loan is approved, the loan funds would be made available via a separate fund account that would be set up for the District as part of the County Treasury pool. The District would withdraw funds from this account to pay approved expenses as they arise. The County would not initially be required to deposit funds into this account, rather the District would be permitted to withdraw funds and create a “negative balance” paying interest at the Treasury pool rate. At the end of each fiscal year the County would pay into the fund account the amount necessary to bring the balance back up to zero.


This ATR will appropriate the funds through June 30, 2009. A June budget revision will be presented to the Board reappropriating the $2.5 million in the FY 2009-10 budget so that the funds remain available next fiscal year.


The loan would be repaid at an indefinite time in the future, but likely no sooner than 7 to 10 years from the date of the loan.