A Town’s ‘Creative Accounting’ Leads to a Fraud Conviction
For years, local governments have had little to fear from using dubious accounting practices to shore up their finances on paper. Sure, critics could scream: In 2015 Paul Volcker, a former chairman of the Federal Reserve, sounded the alarm about states and cities that used slippery accounting to “obscure their true financial position, shift current costs onto future generations, and push off the need to make hard choices.” But rarely have officials been made to answer for their deception.
Until now. Last month a jury convicted Christopher St. Lawrence, the former town supervisor of Ramapo, N.Y., of federal charges including securities fraud in connection with the financing of a minor-league baseball stadium. Prosecutors have frequently jailed local officials for accepting bribes or stealing money. But Mr. St. Lawrence, who could serve prison time and is planning to appeal, is the first to face criminal charges for cooking a municipality’s books. His conviction, part of an escalating federal enforcement effort, should be a wake-up call for towns, cities and states nationwide.
In 2010 residents of Ramapo voted 67% to 33% against using public money to build a new stadium for the Rockland Boulders. So Mr. St. Lawrence concocted an elaborate plan to have the town’s economic-development agency float debt for the stadium. But the agency couldn’t actually finance all the debt: Mr. St. Lawrence was funneling money to it from town accounts. Then he tried to hide Ramapo’s weakening finances.
After assuring a bond analyst in 2013 that the town’s budget was sound, Mr. St. Lawrence was caught on tape telling employees, with a laugh, that to make the numbers work “we’re going to have to all be magicians.” Prosecutors also accused him of recording on Ramapo’s books a proposed $3.1 million sale of town property, even though the deal eventually fell through because the land was a rattlesnake habitat.
Mr. St. Lawrence’s lawyers argued that he did not profit from the transactions. They portrayed him as a well-meaning official guilty only of creative financing. But several witnesses painted a picture of Mr. St. Lawrence as a man who lied to raise money for a pet project and then tried to cover up the result.
The former head of Ramapo’s development agency, N. Aaron Troodler, was charged with conspiring to commit securities fraud and pleaded guilty. He testified at Mr. St. Lawrence’s trial that the town had booked a $3.6 million payment from Mr. Troodler’s agency for rights to the stadium land, even though there had been no such transfer.
Ramapo’s finances remain in disarray, and the town has struggled to pay its debts. But the acting supervisor says there’s no way to know how bad the situation is until officials complete a forensic audit. Meantime, Standard & Poor’s has withdrawn Ramapo’s credit rating because of the town’s unreliable financial statements.
The jury’s verdict ought to resonate far beyond Ramapo. Nearly 44,000 local governments issue debt, and for years the Securities and Exchange Commission, daunted by the task of trying to track their financial filings, did little to discipline public officials. But then came the financial crisis, followed by a rash of government defaults, including in Stockton, Calif., where one official described the city’s bookkeeping as having “eerie similarities to a Ponzi scheme.”
By early 2010 the SEC had created a new unit to police municipal misconduct. Later that year, regulators accused New Jersey of misleading investors over a decade about its pension debt. No penalties were imposed, but the state was told to change its practices. Since then, the SEC has gotten tougher. In 2013 it charged Miami and the city’s budget director, Michael Boudreaux, with financial manipulation that included shifting money among its various accounts “to mask increasing deficits.” In an unprecedented civil trial, a jury found both guilty, and a judge fined Miami $1 million and Mr. Boudreaux $15,000.
With Ramapo, the SEC and prosecutors went a step further by bringing criminal charges. But this may represent the proverbial tip of the iceberg. Municipal budgeting is littered with misrepresentations meant to raise money for favored projects, increase spending during election years, or reward political supporters with rich contracts. Investors and taxpayers should welcome a crackdown.
Mr. Malanga is a fellow at the Manhattan Institute and a senior editor for City Journal.