A Reversal of Fortune at Laguna Beach Unified

Even in this city, which is no stranger to melodrama, the school district’s agonizing fall from grace over the past week made amazing theater:

A school board member emerges after midnight from a tense closed-door session in tears; a once-vaunted superintendent is jeered and publicly humiliated; a powerful parents’ group threatens to withhold a crucial donation until school officials regain the group’s trust.

Somehow, in a head-spinning reversal of fortune, the acclaimed Laguna Beach Unified School District unraveled to the point where its superintendent and top financial officer were forced out over a huge budget shortfall, conjuring up nightmares of another Orange County-style bankruptcy. Another official quit Thursday, leaving three of four top posts empty.

Meanwhile, the seriousness of the district’s budgetary woes gradually began to sink in.

The school board already slashed $1 million from its operating budget An additional $800,000 shortfall was recently discovered. And $500,000 in private donations was being held hostage. The total bite: $2.3 million from a district budget that had hovered around $13 million.

Stunned parents and placard-waving students demanded to know how a huge “bookkeeping error” revealed to the public two weeks ago could have gone undetected throughout months of budget deliberations.

Rumors swirled that the state would take over the district, and that programs from remedial reading to college prep classes could be canceled.

And members of a community fund-raising group found themselves wondering whether their hard-won dollars--a remarkable $500,000--would be squandered when phrases such as “fictitious entry” were being used to categorize items in the district’s accounts.

In soul-searching hindsight, parents asked themselves if the surfboard-making class and the foreign-language program in elementary schools were too extravagant.

Maybe they should have pressed administrators on whether the district was flying too close to the sun. Or asked more questions of charismatic Supt. Paul M. Possemato, famous as the former principal of a troubled East Los Angeles high school featured in the movie “Stand and Deliver.”

Ironically, the very enrichment programs that parents and Possemato had fought for--and had won the district accolades--are the ones now threatened.

“I think it’s real tempting, when you’re in a wealthy district . . . to say ‘Yes’ to parents who are used to having state-of-the-art programs,” said Barbara Norton, district PTA Council president.

“[Possemato] wanted them just as badly as we did. Unfortunately, nobody said no. Nobody said, ‘We can’t afford it,’ and that’s hard to do sometimes when you have parents beating down the door.”

With the school year starting Sept. 5, parents, students, teachers and administrators are struggling to move forward in the face of vexing questions: How could this have happened in a property tax-rich district that just five years ago had $11 million in budget reserves?

And what next?

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Budgetary problems were revealed in February, the same month the chief financial officer took an extended sick leave.

Shrinking property tax revenues, along with losses from the county bankruptcy and expenses from the 1993 firestorm had contributed to a huge gap between projected income and outlays.

The district’s once-hefty reserves had been consumed by additional expenses, such as rebuilding classrooms after the 1993 fire and a major renovation of the high school.

Immediately, parents, teachers and administrators began working to raise money and cut costs. The board slashed about $1 million from the proposed 1996-97 spending budget.

And then another bombshell: On Aug. 6, a district consultant announced that the budget shortfall was far larger than had been estimated.

“To have the rug pulled out from beneath us again has, I think, been the most damaging part of the whole scenario,” parent Peggy Kittell said.

District officials said they discovered a major bookkeeping problem in June. A property tax installment amounting to $325,000 was booked as anticipated revenue in three successive years, and was only paid once. That left the district $650,000 in the hole according to Frank Canales, the former fiscal services director who is now retired.

Canales said he should have found the error earlier. “I feel bad about the whole thing,” he said.

Then, district officials found an additional $150,000 in overlooked expenses, bringing the total shortfall to $800,000.

The fallout was immediate.

On Aug. 12, the board fired Chief Financial Officer Terry Bustillos. The board concluded that Bustillos had failed to properly administer the district’s budget, the district’s attorney said.

Bustillos promptly hired an attorney and denied responsibility for the crisis, saying his repeated warnings of financial peril were ignored. No criminal wrongdoing is alleged.

The next day, the superintendent stepped down under mounting pressure. “I made the offer [to retire early] for the good of the district,” Possemato said.

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Possemato, 62, who made $120,000 a year, is on a combination of paid leave and vacation at $10,000 a month until his official retirement Feb. 3.

He moved out of his office Thursday in what a colleague described as a heart-wrenching exit, a sad coda for a man with a storied career.

In 1991, Possemato was hailed as a hero when he arrived after more than three decades with the Los Angeles Unified School District. In Los Angeles, he was known for restoring peace at Garfield High School.

“When he came here [to Laguna Beach], people spoke about him as though he walked on water, and [said] we were so fortunate to get him,” said parent Mary Dawe.

Co-workers lauded his bold leadership and vision. During his tenure, Laguna Beach won a National Blue Ribbon School of Excellence Award and Thurston Middle School was named a California Distinguished School.

Possemato also launched 28 “education innovations,” including a mandate to make community service a high school graduation requirement, a citywide AIDS education program, and another to reverse a trend of falling high school math scores.

There were so many extras that “we kind of stuck out like a sore thumb,” said Jon Jenett, president of the SchoolPower fund-raising group. “Everybody wondered how we did it. The answer was, we were eating up reserves, and we were spending money we didn’t have.”

In 1994-95, the district spent $5,682 per student, more than any other district in the county where the average was $4,308.

Meanwhile, attention in Laguna Beach was distracted by the aftermath of the 1993 firestorm, the mud slides that followed it and the county bankruptcy. Few gave much thought to the nickels and dimes of school finance until the district’s February bombshell.

Even then, parents said, the numbers kept changing, and no one was sure exactly where the district stood.

Last week, reality hit home.

In a painful display of how far sentiment had turned, about 100 parents and students marched outside the district office, demanding a change of leadership.

“Resign! Resign!” people chanted at a shaken Possemato.

In one meeting, a financial consultant all but called Possemato a liar, challenging his version of a meeting related to the budget crisis.

One closed-door meeting on the superintendent’s future left a board member in tears, long after the public had gone home.

In another blow, SchoolPower members say they wanted proof that the district had cleaned up its act, before handing over a half-million dollars raised for enrichment programs, an amount that bespeaks the community’s commitment to the schools.

“I tell my friends in L.A. and they’re shocked--a town of 24,000 raising $500,000 to put in the school district,” said Dave Slevcov, president of the Laguna Beach Unified Faculty Assn.

Now, the district is faced with the daunting task of rebuilding public trust, its administration and budget. Thursday, the leadership ranks were further depleted when Nancy Hubbell resigned as special services director to take another job.

“It’s pretty frustrating to work for so many years and see things backslide like that,” said Norton of the PTA. “To work together for all those years and to see it all crumble before your eyes is pretty disheartening.”

At a meeting last week, Kelly Nicholas, 11, said she and her friends are “very concerned and a little bit disgusted,” about the district’s crisis.

“They had their hearts set on all this great stuff, great hopes for Thurston [Middle School],” Kelly said. “And now it’s not as great as everyone expected.”

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In response to the crisis, trustees hired Graeme Irish, a former parent volunteer with financial expertise, at $50 an hour to help develop a new budget.

After Irish’s projections are released Monday, the board will start making decisions on budget cuts.

Board members also plan to hire a controller and an interim superintendent.

Rumors that the state would take over the district are untrue, state officials said.

“I’m convinced the board is committed to solving their budget problems,” said John Nelson, an associate superintendent for the Orange County Department of Education. “And everybody’s working with them to see that that happens.”

Even SchoolPower officials say they expect to have their best fund-raising year.

“You have a district that has to face facts and wake up after the party with a hangover,” Jenett said. “The good news is . . . there is tremendous support and caring in our community. The community has already demonstrated it will step up to the plate magnificently.”

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District at a Glance

A quick look at the Laguna Beach Unified School District:

Schools: Four; one high school, one middle school and two elementary schools

Total students: 2,489

* High school: 771

* Middle school: 545

* Elementary school: 1,173

Faculty: 120

Approved budget (1995): $13.4 million

Source: Laguna Beach Unified School District