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O'Learygate: Follow The Money

continued...

A school board headed by the NDP's former campaign chairman uses public funds to engage in an unauthorized, illicit land development scheme and loses $300,000 while the NDP Minister of Education turns a blind eye. And the provincial Auditor General hasn't a word of condemnation for either man in her so-called "special audit."

What's wrong with this picture?

Auditor Carol Bellringer says because she couldn't find that anyone in government or at the school board personally profitted from the land deal, nothing is wrong with this picture.

The ethics of misusing taxpayer dollars and then covering it up escaped her. The political connections between the parties was the farthest thing from her mind, and her audit.

She also spent as little time as humanly possible examining the fishy accounting that supposedly tells the financial story of the Seven Oaks School Board's short experience as land developers.

WE didn't. Here's the sorry story unravelled by The Black Rod.

Let's start with Carol Bellringer's approach to the finances of the deal (emphasis ours):

"Based on the cost allocations provided by the Planner, the financial information for the residential development disclosed a surplus of $512,118 and the financial information for the future school site disclosed an asset in land that cost $819,810. When the financial information for the residential development and the future school site are combined, expenditures for the project exceeded revenues by $307,692, but SOSD maintains an asset in the form of a serviced future school site."

"We did not undertake a review of these financial statements nor did we validate the reasonableness of the cost allocations provided by the Planner."

In ordinary language, the auditor accepted holus-bolus the numbers provided by the man who proposed the land development in the first place, who advised the school board to become the developers, whose company (Lombard North Group) collected $392,868 in fees, and who has, by any reasonable measure, the biggest stake in making the scheme sound good.

No red flags there, eh?

Perhaps Bellringer should have read Page 12 of her own report where she quotes from a forensic analysis of the Swinford Park development prepared by Land Management Services (a branch of the provincial government providing real estate services to provincial agencies.)

The analysis provided in February, 2005, reported:

"The School Division's income statement is not consistent with the quality of financial reporting warranted by a commercial venture of this scale. Any review of the project's financial performance or plint-in-time risk assessment is hindered by the quality of the available financial information."

That said, all we have to work with is the financial statement provided by the Seven Oaks School Board on its website the same statement that Auditor Bellringer relied upon. The financial statement, audited by chartered accountants KPMG, gives the accounting as at Jan. 31, 2006.

Of course you immediately go to the bottom line: minus $307,692.

And that's not counting another $78,000 that was expected to be spent in 2006 on trees, a pond and professional fees. There are no offsetting revenues.

If Bellringer had bothered to ask for an updated financial statement to, say, Dec. 31, 2006 the bottom line would likely read an eventual loss of $385,692.

That means the geniuses at Seven Oaks School Division took a 13.8 percent loss on their illicit business venture.

And, for lovers of irony, the loss is almost exactly what the Planner who proposed the whole scheme earned on the deal (see above).

The Seven Oaks School Division, NDP Education Minister Peter Bjornson, and even auditor general Carol Bellringer prefer to point to the duplicitous $512,118 "net income" realized on the Swinford Park development.

The only way the principles could turn a loss into an alleged profit was through the legerdemain of creative accounting.

Initially the deal went like this: Seven Oaks would buy twice as much land as they needed for a new school, sell the surplus as a developed subdivision, and use the profits to pay for the school land.

But after they got caught--- and they had to come up with an explanation for losing hundreds of thousands of dollars--- they revised their memory of their plan. Now it was two separate and barely related projects.

One was to acquire land for a new high school.
The other was a land development.
Two projects, two sets of accounting.


David Palubeski, the man known to Bellringer as The Planner, was left to apportion the costs of each project to the relevent set of finances. Nobody questioned the fact that, as the man who first produced the school division-as-developer option, he might have an incentive to maximize the benefits of the money-losing project.

This could be done by shifting as many costs as possible to the new school project. That would reduce liabilities for Swinford Park and increase the alleged surplus on that project.

Hocus pocus, loss into profit.

And through the magic of accounting principles, the liabilities now attached to the new school, instantly becomed assets. How, you ask?

Because if a school is ever built on that land, the school division will be reimbursed all their costs by the province. Hello, Peter Bjornson.

That's why the empty lot that the Seven Oaks School Division owns in the Swinford Park development now carries a "net book value" of $819,810.

Taxpayers in the Seven Oaks School Division might wonder why their school board poured $819,810 into a piece of land that's going to sit empty, possibly for decades, not earning a cent. Certainly Carol Bellringer didn't think this use (or abuse) of taxpayers' money was noteworthy.

Remember that the City and the community didn't want a high school in Swinford Park in the first place. Will they welcome a Junior High? That "asset" may never be realized, except as a fig leaf.

Something we found noteworthy, even if we can't explain it, was this strange notation in the Swinford Park financial statement on the school division's website.

Assets
Due from Seven Oaks School Division -- Capital Fund $511,909

That figure comes from nowhere, is never mentioned again, and is not the subject of any note of explanation.

Coincidentally, it is exactly $209 less than the alleged profit on Swinford Park.

Is the Seven Oaks School Division using its Capital Fund to provide the profit on its disastrous adventure in land development? Carol Bellringer didn't think it worth an explanation.

In her world, the Seven Oaks School Division made an honest mistake because of confusing policies, procedures and practices.

"It is arguable that SOSD was not in compliance with the PSA (Public Schools Act) when it undertook residential land development activities in Swinford Park." is the strongest criticism she makes. She softens her biting words by suggesting the school board would have been prudent to get a legal opinion first.

She overlooks the fact that the layman who wrote to the Education Minister in 2004 had no difficulty recognizing that a school board should not be involved as land developers, something which the professionals couldn't grasp. He also recognized that Seven Oaks was trying to hide its involvement.

Bellringer, on the other hand, sees the opposite.

"...we found no evidence that SOSD intended to mislead PSFB (the Public Schools Finance Board which had to approve how Seven Oaks disposed of its surplus land - ed) or to obscure its intended development activities from PSFB."

No, not if you don't count advising the finance board of your intention "to sell the excess land to developers" without mentioning that YOU are the developer. (Special audit P. 19)

And not if you don't count failing to notify the finance board of the tenders received for the surplus land, as required by the regulations, because you intended to develop the land yourself. (Special audit P.22)

And not if you don't count having a meeting with the finance board, as required by the regulations, when there was still time to quash the land development. (Special audit P.22)

And not if you don't count submitting lot sale agreements (LSA's) to the finance board prior to the closure of the sale of each property, as required by the rules, so that the finance board could see you were selling developed lots and not raw land. (Special audit P. 24)

And not if you don't count bamboozling the finance board by writing them about the bid time limits and referencing the normal process of selling surplus land in "as is condition." (Special audit P.20 and 21).

And not if you don't count the school board's lie to the finance board and the provincial authorities that there was "no financial risk" (Special audit P.26) when the Special audit, itself, refers to the risk of "a possible cash shortfall for the school division" (P. 23) and the danger that Seven Oaks School Division "could face financial liability" if the finance board didn't retroactively approve the lot sales immediately (P.25).

Nope. No pattern of deception here.

Instead, Bellringer blamed the Public Schools Finance Board`for failing to keep the Seven Oaks School Board from breaching the act that prohibits trustees from playing fast and loose with taxpayers' money, and for failing to see that the school board wasn't giving them the information they were legally required to provide.

Bad board. Baaad board.


Her "special audit" deserves a special place in the Delusional Hall of Fame.

The sparse facts provided by Bellringer herself tell a story completely at odds with her conclusions.

The Seven Oaks School Board thought they had discovered a clever way to get a new high school at a time when their ideological friends in government were not approving new schools.

They would buy land for a new school, pay for it through profits on a land development, and present the schools finance board with an offer they couldnt' refuse -- free land for a new school.


They tricked the schools finance board into approving the sale of the land they had picked for a subdivision by claiming they were going to sell it "to developers or builders". Instead they launched into their own development project, going through zoning and holding public hearings and always keeping the finance board in the dark by failing to hand over the very information that would have revealed their illicit land development.

When they finally got caught, thanks to a whistleblower Robert Snyder who wrote the Education Minister, they ran to the public schools finance board to bail them out. It was a foregone conclusion. The schools finance board wasn't going to turn them down and be blamed for the loss of two million dollars.

And they knew they could count on the Education Minister to help them keep the scandal under wraps.

And, sure enough, Education Minister Peter Bjornson played his part, even going so far as to mislead the Legislature twice.

First when he claimed he knew nothing about Swinford Park until it was raised in the legislature, only to confess the opposite when the whistleblower's May, 2004, email turned up.

And a second time when he claimed Swinford Park made a profit, without revealing the intricate double accounting that hid the $307,000 loss.He even mislead the whistleblower.

Bjornson stalled a reply to Snyder's email for two weeks, exactly enough time for the public schools finance board to retroactively approve the Swinford Park development.


He let the Seven Oaks School Board draft an unresponsive reply to Robert Snyder without demanding that the board tell him whether Snyder's allegations were true (we'll bet anything that Bjornson already knew the answer).

And in his reply email Bjornson included this:

"If The Public Schools Finance Board (PSFB) approves a new school on that property, the school division is entitled to be reimbursed its acquisition cost at fair market value."


Remember, Bjornson wrote Robert Snyder in May, 2004.

That was two years and four months AFTER the request for a new high school in Swinford Park had been turned down by the PSFB.

And the Minister was still pretending it was a possibility.

But auditor Carol Bellringer saw nothing wrong in any of this.

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