LAO: District oversight works

Despite occasional interference by the Legislature, the system of fiscal oversight over districts by county offices of education has worked, the Legislative Analyst’s Office has concluded.

“Given the substantial fiscal challenges that school districts have faced over the last two decades, the state’s fiscal oversight system has been effective in ensuring that school districts remain fiscally healthy,” the LAO wrote in School District Fiscal Oversight and Intervention, a report released on Monday.

In the two decades that the current system has been in effect, only eight districts – an average of one district every 2½ years – have sought emergency loans from the state. That compares with 26 districts in the dozen preceding years.

And not one district has sought state protection (crossing fingers here) since the onset of the current recession, in which districts’ budgets have been slashed. And that includes Inglewood Unified, which a year ago was seen as a dead district walking, expected to run out of cash at any time. (The fiscal equivalent of last rites, SB 477, a bill that would have appropriated a $13 million state loan, was on the docket.) But, as a result of its own fiscal austerity and monitoring from the Los Angeles County Office of Education, Inglewood surprised observers in March by obtaining a $17.5 million temporary bank loan called a TRAN (Tax and Revenue Anticipation Note) that should enable it to pay its bills at least through late fall.

A state takover of a district that's broke sets off dual process; one involves a takeover of district operations by a state-appointed administrator, the other securing a long-term bond to make the district solvent. Source: LAO. (Click to enlarge.)
A state takeover of an insolvent district sets off a dual process; one involving running district operations by a state-appointed administrator, the other securing a big enough long-term bond to eliminate an operating deficit. Source: LAO. (Click to enlarge.)

That’s not to say Inglewood and perhaps many other districts won’t face insolvency, especially if the proposed tax initiative fails in November, leading to automatic cuts of  $450 per student. Inglewood is one of seven districts that county offices of education have certified as likely to be unable to balance their budgets this year or next. A record 120 districts have been given a “qualified” rating, meaning they may run into trouble within two years.

How the process works

The early warnings – the requirement that districts balance their budgets next year and two years out – are the strength of the system, the LAO found.

After they pass their budgets, districts must submit them to the county for approval, which usually is automatic. Then, twice during the year – in the fall (the first interim report) and in the winter (the second interim, which factors in the governor’s proposed state budget submitted in January) – districts update their financial status. County offices look at a district’s cash balances, reserve levels, operating deficits, attendance and enrollment estimates, salary and benefit costs, and building maintenance costs. It’s largely a self-certification process, but sometimes county offices override, as was the case for the recent second interim report in Inglewood, in which  the district gave itself a qualified rating, while the county insisted on negative.  The county projected fewer students, meaning less state money, and questioned the savings on health benefits from shifting to a new provider, among other things.

County offices have the authority to review contracts with unions and district suppliers for districts with a qualified certification. They can appoint financial advisers to monitor operations for districts whose budgets  are deemed negative. County offices also can stop and rescind financial decisions that districts make.

Inglewood has been under these controls, though it has made the tough decisions to cut staff. Before new administrators  who knew finance were brought in, the district’s auditing and financial systems were a mess. And it has lost about 4,000 students – a quarter of its enrollment – primarily to charter schools. Districts with declining enrollments tend to face the biggest financial problems, the LAO noted.

Glenston Thompson, Inglewood’s chief operations officer, said the district has cut $30 million to $40 million out of a budget of $130 million. Teachers agreed to take 10 furlough days the past two years, and five in the coming year. Class sizes have grown, with a waiver from the State Board of Education. Still, it has to close a $4 million deficit in the next budget.

The county’s job is to keep its feet to the fire, not dictate actions if that can be avoided. “Having a county office there helps the district and the public to understand the district’s precarious situation,” said Melvin Iizuka, the director of the Division of Business Advisory Services for Los Angles County Office of Education. “We remain impartial.”

Avoid emergency loans at all costs

The state has issued eight emergency loans to districts since 1991, with King City, whose troubles predated the current recession, the latest. Source: LAO. (Click to enlarge.)
The state has issued eight emergency loans to districts since 1991, with King City, whose troubles predated the current recession, the latest. Source: LAO. (Click to enlarge.)

Districts should view an emergency loan from the state as the last resort, for the money comes with a loss of control and a stiff, long-lasting price. The state superintendent of public instruction appoints an administrator to run the district. In order to keep bankrupt districts from affecting the state’s credit, the Legislature switched to requiring that districts obtain bonds from private investors through the state’s Infrastructure and Economic Development Bank. As a result, King City is paying 5.44 percent on the $13 million loan it obtained in 2009 with interest eating up 9 percent of its general fund budget; it will face a pre-payment penalty if it pays off the loan in less than 20 years. By comparison, Oakland Unified is paying 1.78 percent on the $100 million it borrowed in 2003.

The LAO report’s sole criticism is for the Legislature, for intruding in the oversight process. In order to ease the impact of budget cuts, lawmakers lowered the minimum reserve requirements for school districts to one–third of their existing levels, “making it more difficult for county offices to raise concerns with districts that were carrying low reserve levels,” the report said. Then, last year, in order to discourage layoffs of teachers, the Legislature prevented county offices from disapproving budgets that weren’t balanced one or two years out. Some districts ignored the warning, and Gov. Jerry Brown backed off insisting on it.

“As districts continue to struggle in the aftermath of the recent recession, we believe preserving the existing oversight system is vital for fostering the ongoing fiscal well–being of districts,” said the report, which was written by K-12 analyst Edgar Cabral.

Author: John Fensterwald - Educated Guess

John Fensterwald, a journalist at the Silicon Valley Education Foundation, edits and co-writes "Thoughts on Public Education in California" (www.TOPed.org), one of the leading sources of California education policy reporting and opinion, which he founded in 2009. For 11 years before that, John wrote editorials for the Mercury News in San Jose, with a focus on education. He worked as a reporter, news editor and opinion editor for three newspapers in New Hampshire for two decades before receiving a Knight Fellowship at Stanford University in 1997 and heading West shortly thereafter. His wife is an elementary school teacher and his daughter attends the University California at Davis.

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