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Mello-Roos taxes, paid by homeowners in new developments, are a virtual ATM for the Poway Unified School District. The District has accumulated so much surplus in these special taxes it spends some of the money in neighborhoods that pay no Mello-Roos at all.

The district pays for everything from a garbage disposal to catered lunches to a $49,000 three-day planning meeting. It even bought a multi-million dollar administration building and furnished it using Mello-Roos money.

There is no legal limit and no standardized formula for calculating Mello-Roos Taxes. In some cases, the formulas are so convoluted that homeowners have virtually no way of knowing whether they’re paying the correct amount.

What’s more there is no state oversight over the funds: at a minimum, the system is far from transparent to those who are footing the bill. Some are asking whether it’s even legal.

“We’re not going to engender support for our schools from the broader community if we’re misusing their funds,” Poway school board member Kimberley Beatty told inewsource.

by Joanne Faryon | inewsource

When Mike Smith and his wife bought a house in an upscale San Diego suburb seven years ago, they were planning to start a family.

Smith agreed to pay an extra $4,140 on top of his regular tax bill every year to pay for the roads and parks in his neighborhood and most importantly, the promise of a new school in the acclaimed Poway Unified School District. He was happy to know he and his wife could walk their child just a block to class.

This summer, Smith was ready to cash in on his investment. His daughter is five years old and entering kindergarten. But he and 55 other families were told in May there wasn’t room. They were diverted to a much older school, in need of repair. “It’s not what we were signing up for,” Smith said.

And, the school is nearly five miles away from his home.

Smith’s extra taxes, called Mello-Roos, were signed into law in 1982 as a way for developers to pass on the costs of infrastructure in new neighborhoods to property owners. They create mini-governments called Community Facilities Districts or CFDs that are administered by cities or school districts. The premise is that growth should pay for growth.

The CFD can issue tax-exempt municipal bonds and pass the debt costs onto property owners in the form of Mello-Roos taxes. They can range from less than $100 a year to more than $10,000. In return for paying these special taxes, the property owners have fresh roads and state-of-the-art schools.

How the Poway district is able to renege on its deal with Mike Smith and the other families is a question not easily answered because figuring out where Mike Smith’s money is spent is like disassembling a pyramid one stone at a time.

inewsource spent months combing through financial documents, reviewing bond statements to the Securities and Exchange Commission, pouring over reams of tax data and bills paid with Mello-Roos money to discover a labyrinthian system that brings in so much money it has accumulated  $168 million in cash in more than 200 bank accounts.

Because bonds finance other bonds and funds are combined in accounts, it is almost impossible to follow the money.

When two inewsource reporters sat down with Poway district officials last year to learn about how Mello-Roos helps pay for schools in new neighborhoods, superintendent John Collins said the taxes could be used for buildings, school buses, even computers, anything that had a lifespan of five or more years.

What inewsource found, however, were invoices for hundreds of miscellaneous expenses related to repairing, upgrading, and furnishing district offices and schools inside and outside of Mello-Roos communities.

Both Poway superintendent John Collins and Marc Davis, the president of  the school board, who chose to be interviewed together, defended how much they collect in Mello-Roos taxes and the way the funds are spent.

Parents love Poway schools and they don’t complain about their taxes, Davis said.

“In fact, we have people flooding to our community. We have high quality schools, high quality infrastructure, high quality facilities, and parents come here because they love the area,” he said. “And so if this was an issue I think we would hear some blowback from our people and I just don’t hear it.”

Taking from Mello-Roos

The name can be deceiving. The Poway Unified School District stretches 100 square miles in the center of the county, encompassing the city of Poway, and several neighborhoods in the city of San Diego. In fact 26 of its 37 schools are in San Diego.

The district has a great academic record – with all of its schools exceeding state standards. Its financial record suffered a major blow after it used a capital appreciation bond to finance $100 million in school renovations, a financing scheme that will end up costing taxpayers $1 billion dollars. Voters approved the renovations in a bond measure, Prop C, in 2008.

Voters also approved Prop U in 2002, allowing the district to borrow nearly $200 million to upgrade older schools.

The improvements included new heating, ventilation, and air conditioning (HVAC) systems, according to a presentation by Collins at a school board meeting last year. In that same presentation Collins told board members the renovations were complete.

But just four months ago, the school board approved spending $16.5 million of Mello-Roos funds to upgrade the HVAC systems at Rancho Bernardo and Mt. Carmel High Schools, the same schools that were supposed to have already been upgraded with Prop U and Prop C funds.

What’s more, neither school is in a  Mello-Roos District.

Kimberley Beatty, a former DEA special agent and law school graduate, was elected to the Poway School Board last November.

As a homeowner in Sabre Springs who pays Mello-Roos taxes, she wondered whether it was even legal to take taxes earmarked for new facilities and spend it on older schools. And why the district hadn’t been able to renovate the schools with the previous bond funds.

Beatty said she was told the district ran out of money and couldn’t renovate all the schools on its list. And, she was told, it was legal to use surplus Mello-Roos funds on the older schools.

“I voted for that agenda item, but pretty soon after I regretted my vote because it just seemed inherently wrong,” she told inewsource.

“You had new communities that were not only set up to pay for their own infrastructure development but also for redevelopment in the older communities and that was why I started questioning this action.”

Beatty wrote to the superintendent to ask for a written legal opinion from district lawyers. She received it a few days ago, three months after the request. But she said most of her questions were not addressed.

The HVAC systems weren’t the only upgrades made at older schools with Mello-Roos funds.

The district also spent more than $466,500 on new computers for Mount Carmel High School last July, according to invoices.

It spent $9.5 million on its new administration building, hundreds of thousands more on furnishing it, and $6,500 on a CAFE sign on the exterior, from Mello-Roos funds. The total cost of the building and the improvements were paid for by homeowners who live in CFDs. Their children make up just 40 percent of the student population.

Surplus taxes are for everyone

The Poway school district collects Mello Roos taxes in 14 different community facilities districts (a 15th was recently formed) for new schools. In some of those communities, it also collects Mello-Roos taxes to pay for roads, sewers, and fire stations – infrastructure separate from the schools.

That’s usually the role of cities, but in 2006, when a large section of the Poway district was being developed, the city of San Diego’s credit rating had taken a nose dive because of its pension obligations. So the developer asked the school district to go the bond market on its behalf to pay for infrastructure and then pass that debt on to homeowners through Mello-Roos taxes.

Collins said the district only uses the “surplus” taxes generated from those “improvement” areas in the non-Mello-Roos schools.

And that distinction, Collins and school board president Marc Davis said, make it legal.

“The value that comes to us in providing that service to the developer, is that over time those CFDs, (Mello-Roos districts) those infrastructure CFDs will build up surplus special taxes we are then able to use for other district wide purposes,” Davis said.

Bond Lunch Money

On Sept. 29, 2011, the Poway Unified School district hosted a three-day design symposium at their administration building to talk about the new $82 million, K- 8 school it was building near Black Mountain in the northeastern section of the city of San Diego. About 100 people attended, among them architects, the developer, parents, students, and school board members, according to board president Davis.

The event, paid for with Mello-Roos funds, cost $48,725.

Breakfast, lunch, and snacks were served over the three days. The catering bill came to $2,443.04.

The district paid for the event and the meals using Mello-Roos funds generated in a neighborhood a couple miles away.  Homeowners there are scheduled to pay an average of $2,600 every year in extra taxes for the next three decades.

“These people were here for three consistent days for eight hours each day for the purpose of designing this, what’s going to be an incredible school in the 4S Ranch area,” Davis said in defense of the expense.

It wasn’t the only catering bill the district paid with Mello-Roos funds. inewsource obtained invoices from The Catering Group between January 2010 and and June 30, 2013. The district spent $3,524 in Mello-Roos funds on lunches during meetings, interviews, and an “event” where ice cream sundaes were on the menu.

There are provisions in the law  for “administration,” but even one of the district’s own financial advisors paused when considering whether a catering bill could be an allowable expense under the Mello-Roos law.

“Lunch I don’t know, this is like a legal question,” Steven Gald, senior director at Dolinka Group said. Dolinka is paid by the district to administer Mello Roos funds.

The district also paid a real estate consultant more than $101,446 from Mello-Roos funds, which included $989 in meals, between January 2010 and July 2012, according to invoices inewsource reviewed.

Many of the hours he charged the district were for meetings unrelated to Mello-Roos communities.

Collins said the general fund will reimburse the Mello-Roos accounts for the charges at the end of the year.

“We always do a reimbursement from the general fund for any expenses that were really not tied to the CFDs,” he said.

“I’d like my money back please”

A small group of parents met at a park in the Torrey Del Mar area a week ago to introduce their kids and to strategize about tonight’s school board meeting.

The kids, all first born, start kindergarten this week, and they’ll be going to the same school, Adobe Bluffs Elementary, miles from where some of them live. They are among the 55 families who, along with Mike Smith, were told there is no room for them at one of the district’s newest schools, Willow Grove Elementary.

All of the parents at the park pay Mello-Roos and believed their children could attend the new school.

“We’ve paid it for 8 years now, and we’re just now getting our first kid into kindergarten,” Mike Eagan said.

Jenny Duncan, whose daughter was looking forward to starting school with her friends, said Adobe Bluffs “is not equitable in any way to the school they’re being sent from.”

Willow Grove is five years old, has an artificial turf field, interactive garden, an outdoor amphitheater and a computer lab with 30 workstations. Adobe Bluffs is 21 years old. In June, the school board approved spending $728,000 in Mello-Roos funds to upgrade the bathrooms and the exterior of the building.

The Mello-Roos act  says families who pay special taxes that helped pay for a new school should get priority in attending that school, but how much priority they get depends on how much of their taxes paid for the facility.

Given the district’s complex financing system and the general language used in describing school facilities in CFD and bond documents, the average homeowner doesn’t stand a chance of tracking her special tax dollars.

Collins, the superintendent, said all the families whose children made it into the kindergarten class at Willow Grove are paying Mello-Roos taxes.

“They all have preference, but when it’s full it’s full,” he said.

Duncan, Smith and other parents asked district officials at the June board meeting why they couldn’t provide relocatable classrooms at Willow Grove for their kids. Several of Poway’s schools use these classrooms in expanding neighborhoods.

“It’s over $100,000 to move one on and off, and it was the decision of staff not to do that at this time, ”Collins told parents at the meeting.

In an interview with inewsource, Collins said he never said the district couldn’t afford the extra classrooms.

“We can order one now and it will be there in January. By then these kids will be settled in Adobe Bluffs … and nobody’s going to want to move, and I don’t know that its worth that effort,” Collins said.

Duncan and the other parents were surprised to learn from inewsource the district has surplus Mello-Roos funds. Some were especially bothered to hear the district spent more than $6,000 on a Cafe sign.

“I’’d like my money back, please, because my husband and I work a lot of hours to provide for our  children. I’d  like my money back if they’re not going to use it appropriately,” she said.

There is no state oversight of Mello-Roos funds. Local governments have to report bond activity and expenditures to the state treasurer, but that office has no responsibility to question what is reported.

Ultimately, the school boards and city councils, which enter into agreements with developers to form Community Facilities Districts, are accountable for the funds, to the taxpayer and the bond market.

Beatty said she takes that job seriously and so has been researching the Mello-Roos act.

Asked whether she thinks the district is spending Mello-Roos funds illegally, she paused.

“I  don’t want to conjecture and that is why I would like a legal opinion from an attorney or … perhaps from the head lawyer of the state (attorney general) to explain to communities, to school boards, to cities, municipalities, what the allowable uses are of Mello-Roos funds,” she said.

Collins said the district is just using the financial mechanisms the state allows to raise money for the district.

“(Is) everyone happy with every dollar spent? I’m sure they’re not. But are they happy with the quality of the outcome and the facility and the education we’re providing to the next generation? Absolutely,” he said.

Beatty takes a different view.

“No matter how happy you are that legal obligation of disclosure doesn’t go away.”

When Mike Smith learned some of the Mello-Roos funds from his community paid for the Cafe sign at the new administration building he was dumbfounded.

“That’s appalling,” he said.

Especially because the district decided not to spend the money on a relocatable classroom that could have made room for his daughter at Willow Grove, the school down her street.

She starts school in two days. And unless the school board comes up with a last-minute solution that will make room for 55 more kindergarten kids, Smith will be driving rather than walking her to school.

inewsource reporter Kelly Paice and data journalist Kevin Crowe contributed to this report

Joanne Faryon is a freelance reporter and former inewsource and KPBS reporter.