Laguna Beach Schools Fall Into Financial Hole

LAGUNA BEACH — For the past five years in this quaint beach town, the story behind the local school district had been the best sort of comeback tale: A charismatic leader comes in and turns a sleepy underachiever into a champ.

But as the summer winds down and the Laguna Beach Unified School District gears up for another school year, the parable being told is of the cautionary sort--how a high-flying school system with the best of intentions spent itself into the hole.

In the past two weeks, about $800,000 has been discovered missing from the district’s budget, the result of a series of bookkeeping errors, officials have said. Alone, the shortfall would be merely disturbing. But earlier this year, the community learned that the district’s revenue projections were off, its once-ample reserve fund was drained, and $1 million would have to be slashed from the budget for this year.

The cumulative furor manifested itself this week in a flurry of breast beating and public tears, of jeering crowds and outraged community groups. Stunned parents and placard-waving students who once lauded the district demanded to know how such a huge “bookkeeping error” could have gone undetected throughout months of budget deliberations.

Rumors swirled that the state might take over the district, and that programs from remedial reading to college prep would be axed. Parents wondered for the first time whether the surfboard-making class and the foreign language program in the grade schools were too extravagant.

The superintendent, the top financial officer and a third district official quit in the space of a week, leaving three of four top posts empty. Shaken by the $1-million cut in the operating budget and the $800,000 accounting glitch, a community fund-raising organization held a $500,000 donation hostage, fearing that it would be squandered.

The total bite: $2.3 million from a district budget of about $13 million.

Even in hard-driving Orange County, where tales of boom and bust have become commonplace, the reversal of fortune assailing the Laguna Beach schools--and the outcry surrounding it--has been remarkable. In soul-searching hindsight, parents are wondering whether they should have watched the purse strings more closely, or asked tougher questions of Supt. Paul M. Possemato, the famed former principal of the troubled East Los Angeles high school featured in the movie “Stand and Deliver.”

“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.”

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The district’s budgetary problems were first revealed in February, the same month that the chief financial officer took an extended sick leave. Shrinking property tax revenues, losses from the county’s bankruptcy and expenses from the 1993 firestorm had contributed to a substantial gap between projected income and outlays.

As recently as five years ago, the district had an $11-million reserve fund. But the rainy-day money had been consumed by additional expenses, such as the replacement of classrooms after the 1993 fire and a major renovation of the high school.

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.

But in June, district officials say, they discovered another bombshell: A property tax installment amounting to $325,000 had been booked as anticipated revenue in three successive years, and paid only once. That left the district $650,000 in the hole, said Frank Canales, the former fiscal services director. Aggravating matters was a second error that had caused district officials to overlook another $150,000 in expenses.

Canales, who is now retired, said he regretted not having found the shortfalls earlier.

When the errors came to light, however, the fallout was immediate. On Aug. 12, the board fired Chief Financial Officer Terry Bustillos, charging that he had failed to properly administer the district budget.

Then--as Bustillos hired an attorney and denied responsibility for the crisis, saying his repeated warnings of financial peril had been ignored--the superintendent stepped down.

“I made the offer [to retire early] for the good of the district,” Possemato said.

Possemato, 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.

Possemato, 62, had been hailed as a hero when he arrived in Laguna Beach in 1991 after more than three decades with the Los Angeles Unified School District. In Los Angeles, he was known for restoring peace to troubled Garfield High School.

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 program to reverse a trend of falling high school math scores.

At the time, the innovations were the pride of the community. Now, however, parents wonder whether their vanity kept them from asking questions while Possemato built a school that was beyond their means. By the 1994-95 school year, the district was spending $5,682 per student, more than any other district in a county where the per-student average was $4,308.

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

Last week, reality hit home.

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

SchoolPower members demanded proof that the district had cleaned up its act before handing over half a million dollars raised for enrichment programs.

Now, the district is faced with the daunting task of rebuilding its administration, budget and public trust. Thursday, the leadership ranks were further depleted when Special Services Director Nancy Hubbell resigned for another job.

In response to the crisis, trustees have 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 today, the board will start making decisions on budget cuts.