Audit Could Cost Schools $70 Million for Desegregation : Education: Report cites faulty records as a reason to deny repayment. The district may even owe the state $9 million.

The Long Beach Unified School District stands to lose more than $70 million if the state accepts a preliminary audit report faulting the district for having incomplete financial records for its voluntary desegregation program.

Loss of the funds would be a stunning blow to the state’s fourth-largest school system, which fought a costly five-year legal battle to be reimbursed for money it has spent on desegregation. Last year, about 15,500 of the district’s 71,500 students voluntarily attended schools outside their neighborhoods, vastly improving the district’s ethnic balance.

The preliminary audit results have infuriated Long Beach officials, who feel that what they won in court, they have lost in the accountant’s ledger.

“We disagree with almost everything in it,” said one administrator, who asked not to be named. “We will very likely end up back in court again.”

In November, 1990, a state appellate court ruled that the state must reimburse Long Beach for its desegregation expenses dating back as far as 1977. Before paying the money, however, the state controller’s office sent auditors to examine the district’s financial records.

The confidential draft of the audit concludes that, because of incomplete financial statements, the district is entitled to receive nothing, according to sources close to the audit. Indeed, auditors contend that the district owes the state $9 million, sources said.

Officials from the controller’s office agreed to speak about the auditing process only in general terms until the Long Beach report becomes final, probably in late January.

“Whatever the nature of the claim is, you need some sort of justification or verification that this is the correct amount that should be paid or reimbursed,” said Edd Fong, spokesman for Controller Gray Davis. “If a district doesn’t have records, it does present a problem. I know it goes back a long way.”

School district officials would not discuss the audit. But sources said the report faulted the district for failing to keep records that state laws allowed them to throw away.

The district’s claims reach back to 1977 when the state Board of Education directed the schools to desegregate. In 1986, Long Beach Unified sued the state, contending that desegregation was mandated by the state and should be fully paid for by the state. In recent years, the state has reimbursed the district for only 80% of desegregation costs.

The court sided with Long Beach, entitling its schools to claim $28 million in desegregation costs through 1985. With interest, that amount totaled more than $40 million. But Long Beach also contended that it is owed money for desegregation costs incurred since 1985, for a total of at least $70 million.

Much more is at stake for the California Department of Education, however. If other districts statewide follow Long Beach’s lead, the cost to the state could amount to more than $500 million, officials said.

Thus far, about 30 school districts have asked the state for reimbursement under the Long Beach formula, said Stephen Luhrs, audit supervisor for the controller’s office. Among them are the Los Angeles Unified School District--the nation’s second largest--and the Pasadena Unified School District. The Los Angeles claim alone could total more than $200 million with interest, said Richard Mason, an attorney with the district.

Because it is unlikely that any new money would be generated to pay the claims, the funds would have to come from the already beleaguered state education budget, officials said.

“We weren’t opposed to giving Long Beach money if it was a state mandate, but we were opposed to giving money to Long Beach at the expense of other schools,” said Joanne Lowe, an education department attorney.

The state Board of Education was so concerned over its financial liability that in June it repealed the guidelines directing schools to desegregate. Civil rights groups criticized the move as backing away from commitments to equal education opportunity for all students.

Revoking the mandate saves the state from footing future desegregation costs, but it does not remove the financial responsibility for past years.

State auditors asked Long Beach officials to produce detailed records to justify their reimbursement claims for 1977 through last year. Some of the records were long ago discarded, sources said. The auditors consistently disallowed claims based on incomplete records and concluded that the district must therefore pay the state $9 million.

Regardless of the audit results, district officials said they have no intention of ending the desegregation program. Its centerpiece is magnet schools--those with special curriculums to draw Anglo students into minority neighborhoods and vice versa. The district has 39 magnet programs at 45 school sites.

When Long Beach began voluntary desegregation, a majority of its students were Anglo. According to recent figures, the district student population is about 32% Latino, 28% Anglo, 19% black, 15% Asian, 4% Filipino and 2% from other ethnic groups.

There are eight district schools with a student population that is more than 50% white. That number would rise to 38 schools without the desegregation program, and 28 of those would be more than 70% Anglo, Deputy Supt. Charles Carpenter said.