PREVENTING SCHOOL DISTRICT FINANCIAL CRISES

Grand Jury Annual Report, 2004-05, Education Section

INTRODUCTION

In the past half-dozen years many school districts in Alameda County have faced serious fiscal crises. Two of these -- Oakland and Emeryville -- required state bail-out loans which resulted in the takeover of the districts by state-appointed administrators. Four others -- Hayward, Berkeley, Livermore and Albany -- involved the appointment of fiscal advisors who took control of the districts’ financial affairs to one degree or another. Previous grand juries investigated these crises and reported on them.

A common pattern in all these grand jury investigations was that the statutory plan for preventing school district financial crises failed. Once a crisis developed, the county office of education or the state stepped in to clean it up, often with great disruption to the schools and everyone involved with them. The legal mechanisms intended to prevent fiscal crises from developing in the first place were not adequately administered. Because of this failure in several school districts across the state, a year ago the state legislature added new powers to the crisis prevention law on an urgency basis. State law clearly seeks to head off crises before they develop.

The 2004-2005 Grand Jury agrees with the concerns of previous grand juries and has undertaken to review the prevention responsibility of the Alameda County Superintendent of Schools. The Grand Jury reviewed the prevention process under state law and responses to a survey of all 18 school districts. The Grand Jury also met with six district superintendents, the county superintendent, the associate superintendent for business services (now retired), members of the Alameda County Board of Education, and the head of the state’s Fiscal Crisis and Management Assistance Team (FCMAT).

BACKGROUND

At the outset, it must be acknowledged that school district budgeting is very difficult. This is particularly true for revenue. In the spring when the budget for the coming school year is prepared, enrollment in September must be estimated. A school district’s revenue comes mainly from the state and depends on average daily attendance that is usually around 95% of enrollment. If enrollment is down, revenue will be down. Over the past half-dozen years, enrollment in about half of Alameda County’s eighteen school districts has gone down.

In addition, the total amount of state funding has not been what state law has prescribed. The state’s own fiscal crisis has led to a diversion of school funds to other areas. In the current fiscal year, $2.3 billion in Prop. 98 school funds are being diverted elsewhere. The reduction (i.e., enactment of the state budget) occurs after the school districts’ budgets must be completed. School districts face great uncertainty on the revenue side of their budgets. A prudent district must estimate its revenues conservatively. It has almost no control over its revenues and must fit its expenditures to its revenues. When revenues decline, it must cut expenditures in order to operate with a balanced budget. School districts are not permitted to operate with a deficit. Neither can they borrow money to pay for operations.

School districts are controlled by locally-elected school boards and are run on a day-to-day basis by superintendents hired by the school boards. These are the people who face the tough choices involved in fitting expenditures to the revenues over which they have almost no control. They have not been able to make these necessary tough choices in many cases. School board members are elected by promising to do more for our children, not by promising to cut the budget. So there has sometimes been a problem of political will. In addition, school board members rarely have financial backgrounds. There is also a lack of well-qualified school finance officials, part of what several witnesses referred to as the “human resources crisis.” In Alameda County over the past half-dozen years, there has been a frequent turnover among school board members, superintendents and chief business officials.

These difficulties are precisely what lay behind the state legislature’s decision to set up the fiscal crisis prevention system in which the county Superintendent of Schools closely monitors each school district’s budget and quickly intervenes when fiscal problems begin to develop. The goal of the system is to head off problems before they reach crisis proportions that usually lead to a loss of local control. Under the statutory scheme, the county superintendent is a partner in maintaining the fiscal solvency of each school district.

INVESTIGATION

Under state law, the county superintendent of schools has many responsibilities concerning school districts’ budgets. They can be discussed under three headings.

The Initial Budget

Each district must submit its annual budget to the county superintendent by July 1. The county superintendent has until August 15 to analyze the budget before approving, conditionally approving or disapproving it.

During these six weeks, the superintendent’s staff of analysts evaluate key aspects of each budget; such as, whether the enrollment projections for the coming year are reasonable in light of historical trends and known recent developments and whether the number of teachers and other personnel can be supported by the revenue the projected enrollment will produce. Not every item in a budget need be analyzed, only a limited number of critical items. The county staff should work with the district during these six weeks to get the answers to its questions and to recommend changes in the district’s budget that will permit the county superintendent to approve it. This should not be an adversarial process but a cooperative one. The county superintendent must ultimately be satisfied the district’s budget is in balance.

The standard the county superintendent applies is two-fold: (1) whether the district’s budget complies with the state’s “standards and criteria adopted by the State Board of Education;” and (2) whether the budget will allow the district to meet its “financial obligations during the school year and its multiyear commitments” (for example, contracts calling for salary or benefit increases in future years). If the district’s budget does not meet this standard the county superintendent must conditionally approve or disapprove it and tell the district what changes must be made to gain approval. At this point, the county superintendent can appoint a fiscal advisor to help the district. The district has until September 8 to revise its budget. The county superintendent then has until October 8 to analyze the revised budget and, if it balances, give final approval.

The detailed, step-by-step procedures in the law for the county superintendent’s review of each district’s budget makes clear the proactive, hands-on role the county superintendent is meant to play. If a district fails to adopt a balanced budget, the county superintendent and the State Superintendent of Public Instruction can impose a balanced budget on that district. Although this has never occurred in Alameda County, it is important to understand that the law puts the ultimate responsibility for balanced school budgets on the county superintendent.

The Alameda County Superintendent of Schools has been criticized in the past for taking too passive a role with this responsibility for preventing financial problems from developing into crises. As an elected official, aggressive intervention is necessary even though it may involve political risk. Preventing school district insolvencies is a superintendent’s primary function under the law. Cleaning up after insolvency is a secondary function if a county superintendent fails in their primary function.

Interim Reports

Twice during each school year, on December 15 and March 15, districts must provide updated financial information to the county superintendent. This is to enable the county superintendent to determine that the districts will be solvent at the end of the school year and maintain the reserve required by state law. The districts certify themselves as:

Positive if they will have a positive fund balance and the required reserve at the end of the current school year and the subsequent two school years;
Qualified if they may not meet this test; or
Negative if they will not meet this test.

The county superintendent must change a district’s self-certification to qualified or negative if it is determined that the test for a positive certification has not been met. If a district is certified qualified or negative, the law again spells out in detail the steps the superintendent must take “to ensure that the district meets its financial obligations.” There are several stages, including the right of the district to appeal the superintendent’s decision to the State Superintendent of Public Instruction. In the end, however, if the superintendent’s determination that the districts will not be able to meet its financial obligations is upheld, the superintendent, “in consultation with the [state] superintendent, shall take at least one of the actions described [below] and all actions that are necessary to ensure that the district meets its financial obligations.…”

In consultation with the district, the superintendent can impose a budget revision that will enable the district to meet its budget obligations;
The superintendent can stay and rescind any action by the district inconsistent with its ability to meet its financial obligations;
The superintendent can assist the district in developing a financial recovery plan to meet its future obligations;
In consultation with the district, the superintendent can assist in developing the next year’s budget;
The superintendent can appoint a fiscal adviser to perform any of these duties on their behalf.

It is important to note that the law does not give the county superintendent discretion on whether to act or not to act. The burden of proof is on the school district. If a district cannot demonstrate through interim reports its ability to meet its financial obligations, the county superintendent must act. The law consistently uses the word “shall,” not “may.”

Going Concern

So far, the law has set up detailed procedures for the county superintendent to follow in reviewing districts’ budgets at the beginning of the fiscal year and at fixed times twice during the year. But the 2004 law goes further. It requires each school district to give the county superintendent any study, report, evaluation or audit prepared for or by the district, the county or the state “that contains evidence that the school district is showing fiscal distress” or that 3 of the 15 “predictors of a school district needing intervention” are present (See Exhibit A, attached). If so, the county superintendent must “investigate the financial condition” of the district. This is a very broad responsibility and not tied to regularly scheduled budgetary submissions. The law says “if at any time…the county superintendent…determines that a school district may be unable to meet its financial obligations for the current or two subsequent fiscal years” they “shall” go through the intervention steps outlined in the section above on interim reports.

This “Going Concern” responsibility existed in the 1991 law but it has been substantially broadened in the 2004 law, particularly to obtain evidence of fiscal distress and predictors of a need for intervention before the county superintendent.

Another section of law adds to this evidence. Any collective bargaining agreement negotiated by a school district must be certified by the district superintendent and its chief business official to be within its budgetary capabilities for the term of the agreement. If cuts elsewhere in the district’s budget are needed to pay for any negotiated salary or benefit increase, they must be addressed in the district superintendent’s and chief business official’s certification. If the cuts are not made “in the current fiscal year” then the county superintendent must give the district a qualified or negative certification and follow-up with the intervention steps outlined in the section above on interim reports.

The fiscal crisis prevention law was revised in 2004 to reinforce the responsibility of the county superintendents and give them more authority. Additionally, the law provides that the state superintendent of public instruction “shall monitor the efforts of a county office of education in exercising its authority under this section and may exercise any of that authority if the superintendent of public instruction finds that the actions of the county superintendent of schools are not effective in resolving the financial problems of the school district.”

In responding to previous grand jury recommendations that the superintendent be more proactive in preventing school district financial crises, the superintendent has emphasized the limitations on the superintendent’s authority and the complexity of school finance. The superintendent has said that school district budgets are the districts’ responsibility and the superintendent’s office’s responsibility is merely to monitor -- to perform oversight -- as if oversight did not have a clear purpose. The record shows the superintendent was more reactive to crises than proactive in preventing their development.

Specifically, a greater percentage of the superintendent’s 620 staff members should be devoted to the task of monitoring school districts’ budgets and investigating situations likely to cause “fiscal distress.” Currently, there are four analysts and one manager with this assignment, less than 1% of the county office of education’s staff. The superintendent points out this will require taking staff from other functions. Few functions are as important as preventing school district fiscal crises, particularly given the recent history of crises in Alameda County.

The superintendent has been reluctant to change a district’s self certification from positive to qualified or negative and has avoided qualified certifications based on first interim reports. This seems to be an avoidance of both the letter and the spirit of the law. The first interim report contains the first actual numbers on enrollment for the year and gives a district the most time to deal with financial difficulties. A qualified certification compels the superintendent to take action. Early use of the qualified certification alerts the public to the existence of a problem and brings to the district’s attention the necessity of intervention by the county office of education. It should have the effect of assisting districts in convincing the public that tough but necessary choices must be made.

The superintendent should devote more staff effort throughout the year to investigating evidence of fiscal distress and known predictors of the need for intervention. Staff should be visiting with the districts and exploring the key areas that make or break a budget and not be waiting passively for periodic reports. Finally, as the only county-wide elected education official and the one charged by law with preventing school districts from going into financial crises, the superintendent should become the very public champion of school district solvency. The media and public appearances at district school board meetings would be two means the superintendent could use.

CONCLUSION

The Alameda County Superintendent of Schools has not been effective in preventing school district financial problems from developing into crises. There have been a disproportionate number of fiscal crises in Alameda County in the past half-dozen years. The superintendent has taken a minimalist approach to the job of prevention.

The new law, AB 2756 of 2004, reemphasizes the primacy of prevention and adds substantially to the county superintendent’s powers of prevention. The law intends that the county superintendent be a full partner with the local school districts in the maintenance of financial solvency. The county superintendent has allocated too few staff to the task of analyzing school district budgets and interim reports and particularly to investigating evidence of financial distress.

The county superintendent has not publicly embraced the responsibility under the law for preventing school district financial crises. Nor has the superintendent shown leadership as the only county-wide elected education official by becoming a public champion of the tough but necessary choices that must be made by school districts to maintain balanced budgets.

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