Is it really this bad?

[SDHeights]

It really appears to be simple fraud. Mr. Watson and the CFO made representations to their ability to manage the endowment which were obviously false from the get-go; but they most likely strong-armed the board into following their plan. The big question is who personally benefited from those decisions, and who is currently benefiting from the decisions being made today.

Question to Retired CPA: Were you able to determine the nature of the $600,000+ payment to one of the individuals on the management team? Are those types of transactions normal?

[4n6]

I’ve been studying that same document for a while now, so I won’t restate what Retired CPA has already identified. The best table for understanding the accelerating debt service payments is on page 10 of 168, which reflects debt service absorbing more and more of the available resources until peaking in 2033. More immediately concerning are the bond covenants on pages 21-24 of 168 of the bond offering document; the most significant of those covenants is the requirement that the School’s debts cannot exceed 40% of its assets, which it may have in fact already violated considering the amounts reported on the 2015 IRS Form 990 balance sheet on page 11 (Part X). The covenants state that the computation is based on the annual audited financial statements, so I don’t know if there is a permissible variance between the IRS Form 990 and the audited financial statements for the same period, but the ratio as of 12/31/2016 appears to exceed 40%, which could lead to a bond default. The bond covenants likely produced the Charged by Promise fundraising campaign to record future years’ donations as current receivables to repair the 40% debt ratio with additional assets, but that is hardly a sustainable solution as the recorded receivable is amortized unless future fundraising is equally successful in replacing the amortized amount aged off the balance sheet each year.

I would like to also add some concerns with the 2015 IRS Form 990 filing:

First, after always responding “Yes” to the question #22 on page 4 to “Did the organization report more than $5,000 of grants or other assistance to or for domestic individuals on Part IX, column (A), line 2?” as most similar organizations do, this filing responded “No” and then proceeded to report -0- for that corresponding line item (line 2 on page 10) thereby understating annual expenses; instead the financial assistance was buried as a subtraction from revenues on page 9, line 2a as a contra-revenue. This is neither consistent with all previous reporting nor is it accurate, so one must question the rational for both the inaccurate reporting and the unnecessary change in reporting method for the annual expenses.

Second, in all the filings of the IRS Form 990 that I reviewed, the School’s reported endowment fund balance (see Schedule D Part V) is always substantially higher than the amount reported as “Total net assets or fund balances” on the same filing’s balance sheet (page 11). Aren’t they the same thing? How can any endowment be greater than the net of assets minus liabilities?

Finally, the amount reported on line 8 on page 10 (Part IX) for “Pension plan accruals and contributions” increased in a single year by $504,370 from $1,334,772 to $1,839,142, but the amounts reported for “Salaries and wages” and “Payroll taxes” barely increased, so how can that possibly be accurate? Is it reasonable for the pension accrual to increase by over 37% while the underlying payroll increased by under 2%? Was it previously being understated and this is a large multi-year correction?

To my eye, the end game here appears to be the phasing out of financial assistance, while tuition zooms past $30k/year for a student body of only full-pay students. The quick math is $36M of actual expenses ($35M on page 11 plus $1M of additional debt service) with no financial assistance and little endowment support with revenue spread over 1,200 students at $30,000/each. Albuquerque is not a large market, so could it even find 1,200 full-pay students at that price level? If it can, how low will its standards be relaxed to fill the School’s seats? One can argue about the exact mix, but I don’t see how tuition and financial assistance are not heading in opposite directions with the endowment treading water to maintain the 40% debt ratio.

The School is boxed in by that 40% bond covenant ratio, so potential solutions will be difficult to implement, but better to have a frank discussion among stakeholders than to continue pretending there is currently a sound plan already in place. The sooner we set aside the digestion of the historical malfeasance and figure out how to save the School, the better. From the information that is publicly available, it would be irresponsible to conclude that crimes were committed, so such discussions should stop; instead, it’s painfully clear that there has been a 3-decade long history of conflicts of interest, gross incompetence and poor financial stewardship, and it needs to change.

[AAAlum]

Thank you to Retired CPA and 4n6 for the information. Does anyone know if there are CPAs on the board? How many?

Did any board members raise their concerns about the investment by Academy into Mariposa? And in recent years as the endowment has significantly decreased? At present-day with the financial issues that this forum is bringing forward? Many times the board has commented about how complex and difficult it is to explain the 990, the endowment and financial situation but two contributors to this forum have provided more information to the community than the board has since this site went live.

Is it possible there are no finance and accounting professionals on the board and this is how we got to the point that we are asking “Is it really this bad?”

[Retired CPA]

SD Heights…please direct me to where this 600,000 fee is. I didn’t see this.

Questions which should be addressed.

Administrative salaries are way above any comparable salaries locally. Benchmarks are irrelevant.
Why are there so many highly paid administrators. 7 individuals making close to 200,000 and higher. 3 in finance. A CFO, A business manager and a finance manager. That’s a lot of finance people making a lot of money with little noticeable benefit seen given the rapidly dwindling endowment.

Mariposa deal
In 1994-5 Mariposa land was bought for 4.5 million dollars.
In the Audited 2008 financials this land was valued at 103,000,000.
Why did AA not sale some of this land at this point to lock in their huge return on this investment?
Did anyone, CFO or trustees recommend locking in at least some of the profits at this point?

This investment is now valued around 9-10 million dollars.
But you have the lawsuit that cost 5-6 million, and probably several millions more of losses, but I don’t have the detail on this. Basically over 24 years a negative return on this money.

If however that 4.5 million had been invested in a conservative fund with a return of 6% over 24 years this would have doubled twice and would be worth 18 million dollars.
This highlights what conservative fiscal management would have accomplished as opposed to the highly risky ventures undertaken.

Finally, there is a 15,000,000 partnership on the 990’s. What is this. Need to get the details on this partnership.

Community is important and it is sad to see people who made financial decisions in part because of the solid reputation of the Academy, harmed. The financial situation is only one aspect of the problem….the loss of ones reputation seems to me to be the much bigger problem.

[SDHeights]

Form 990, 2005, Part V-A:
Dick Elkins, Treasurer: $628,941 base salary + $35,223 bonus/deferred.

Re: 4n6
“From the information that is publicly available, it would be irresponsible to conclude that crimes were committed, so such discussions should stop; instead, it’s painfully clear that there has been a 3-decade long history of conflicts of interest, gross incompetence and poor financial stewardship, and it needs to change.”

I’m not sure how fairly obvious conflicts of interest and complete lack of fiduciary responsibility don’t fall into the category of potential crimes that may have been committed.

The Mariposa lawsuit (filed on these same fine folks btw) was for, among other things, fraud.

[4n6]

Re: SDHeights

For the financial matters being discussed here, I seriously doubt the potential conflicts of interest or fiduciary breach rise to the level of criminal actions; they could be civil matters, but I have seen no evidence in the publicly-available information that any crime has been committed and furthermore, the statute of limitations on any bad actions likely expired long ago with many of the potential bad actors long gone. As a practical matter, no one here has any standing to demand access to the original records nor the ability to execute or pay for a forensic examination, and for which a legal remedy no longer exists, so this line of thinking seems to me counter-productive to solving the looming issues. However, if you – or anyone else – have credible evidence of a crime, you should contact the appropriate authorities to fulfill your own moral obligations.

[Retired CPA]

Elkins compensation in 2005 is beyond comprehension. In 2007-8 AA hires a CIO, Theodore Balph at approximately 380,000 a year. They keep Elkins as well paying him 330,000. Shortfall of 26,000,000 from 06-08. Looks like no liquidity so they sell millions of dollars of stock at what would be a decades low to cover expenses. I am speculating here, but things are starting to unravel at this point. Looks like the CIO is gone by 2009 and now we add another CFO from the board, Gordon. Two CFO’s…..well why not. Elkins is paid 183,000 and Gordon is paid 227,248.
Honestly, a for-profit company could never operate like this and survive, but these guys had the endowment piggy bank to raid everytime they overspent or made risky decisions that didn’t pan out.

Salaries are unsustainable at current levels. Head master has lost a lot of people’s confidence it seems. He should have cut his pay and his numerous CFO’s CIO’s etc years ago.
Relying on tuition Revenues from a poor state to fund your school long-term won’t work.
Accepting all full pay students without regard to academic performance will lower the quality of your school.
Quality students will be given scholarships and financial aid at competing schools….how many will chose these schools? Some? Many? Time will tell. I think it will be many, and the quality of competing schools will rise along with their endowments.
One thing not mentioned is the morale of the teachers and employees with so much strife and dysfunction. This to will negatively impact students and education.
It is a sad day for our community and for the AA.

One last comment…if something isn’t done by the admin and board the only recourse I see is to get the states attorney general involved. He is the only one who can look after the public’s interests in a situation like this.

[MakeAAbetter]

As a parent of two AA students, I want this institution to remain open and thrive in the future. It has been a second home to our family for a long time now and is an educational oasis in comparison to public education offered here in NM. A subject that really bothers me, is the recent talk about the new CFO position. Rumor has it that attorney’s, not CPA’s or any financial background persons, are the top candidates. Is the board really allowing this mistake to happen again? Putting an attorney in charge of the schools financial decisions? What is going on?? Can this be clarified in the public information meetings? Other parents have mentioned to me that Andy seems very dismissive to the fact that a CPA should be the new CFO.

[Retired CPA]

Looking to fill the CFO position with an attorney makes no sense to me. I don’t think the school survives unless they bring in a strong leader who is willing to make significant cuts to spending and change the current culture at the school. Watson has had 15 years to fix the problem.

[Author]

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