Strapped School Districts Surge

A growing number of California school districts are veering toward bankruptcy, leading lawmakers Thursday to overhaul the state’s fiscal oversight of troubled districts in hopes of avoiding bailouts that could cost state taxpayers millions of dollars.

Changes devised by Gov. Arnold Schwarzenegger, state education officials and legislators would be the most significant since 1991, when state officials were given authority to appoint trustees to oversee the recovery of troubled school districts.

Those interventions may have helped some ailing school systems, but they did not stop the proliferation of districts in financial trouble.

The state Department of Education’s most recent watch list identifies 45 such districts, including five in Southern California. Only 17 districts made the list in 1996.

“The list has been growing, and it’s a major concern,” said state Supt. of Public Instruction Jack O’Connell. “I’m hopeful that the early intervention [from the new reforms] will help us keep districts from coming to the state hat in hand after the fact.”

The department says nine of the 45 districts are projected not to meet their financial obligations this academic year or next. Together, their budgets exceed $1.1 billion. The state Senate agreed to a $60-million loan for one of those districts, the seventh state bailout since 1991. Two other insolvencies occurred last year.

There are many causes for districts’ financial problems, education officials say. Like the state’s, districts’ balance sheets have been hurt by California’s economic woes. Some districts have been too optimistic in their assumptions of how much aid they could expect from Sacramento, a problem exacerbated by the state’s recent penchant for midyear cuts in assistance.

“What’s happening right now is similar to what happened in the early 1990s,” said Brett McFadden, legislative advocate for the Assn. of California School Administrators. “Whenever the state budget suffers a cold, a lot of districts begin to suffer pneumonia.”

In addition, officials said that poor management in some districts had worsened the problems and that some expansive teachers’ contracts had restricted administrators’ abilities to cut back.

Whatever the reasons, districts with financial difficulties often have trouble extricating themselves, because many parents transfer their children out, prompting the state to reduce annual aid, since is it allocated per pupil.

This month, lawmakers consented to bail out two Bay Area districts. After activists staged a monthlong hunger strike on Capitol grounds, officials agreed to lower the interest rate on $28.5 million in loans given to the West Contra Costa Unified School District in the early 1990s.

Lawmakers also approved a $60-million bailout for the Vallejo City Unified School District amid GOP insistence that the Legislature also enact broad reforms.

These changes expand the authority of state-appointed administrators to revise district budgets and adjust educational offerings to reflect fiscal reality.

They also direct state overseers to examine how well the elected county superintendent of schools is monitoring an ailing district, and to take over that responsibility if the state finds widespread failures -- even before a district goes belly up.

“We wanted not just a rifle-shot approach but a broad-based approach to deal with all districts,” said Schwarzenegger spokesman H.D. Palmer. The governor is expected to sign the reforms into law next week.

The superintendent of an insolvent district would be automatically fired under the new plan, and the state overseer would be empowered to remove other high-level staff with cause. The reforms would require monitors to provide much more information to Sacramento, where many legislators are angry that Vallejo’s fiscal condition was allowed to deteriorate to the extent that it did.

Sen. Dede Alpert (D-San Diego) said, “As a school district gets in trouble, we will know more quickly, we will be able to intercede more quickly and it will be a smaller dollar amount.”

Some Senate Republicans, who had insisted on the broad reforms as a condition of supporting the Vallejo bailout, said the supervision did not go far enough and warned that the next time they were asked to approve a bailout they would insist on far more severe measures.

“Under the terms of this particular bill, I think you are more likely to see more school districts headed to the taxpayers for a bailout,” said Sen. Roy Ashburn (R-Bakersfield), one of five senators to vote against the proposal. He said school districts that go bankrupt should be able to nullify teachers’ contracts.

The Vallejo bailout is the second largest in modern state history, after Sacramento’s $65-million loan to the Oakland Unified School District last year. The state also granted a $1.3-million loan to West Fresno’s elementary district in 2003, and a similar-size loan to the Emery Unified School District in 2001. Loans in the early 1990s went to the West Contra Costa (at the time called Richmond), Coachella Valley and Compton districts.

Palmer said the state was owed $181 million from outstanding emergency loans, including the upcoming one to Vallejo. To relieve some of that pressure on the state budget, the administration has proposed issuing debt to pay for Vallejo’s and future bailouts. That suggestion is part of the budget package being negotiated for the fiscal year that begins July 1.

The increase in troubled districts is not a sudden phenomenon. Starting in 2001, the number of districts on the watch list began to balloon, but lawmakers did not take action until it became clear that Vallejo’s problems were insurmountable. The district had been on the watch list since the 2000-01 academic year.

Barbara Kerr, president of the California Teachers Assn., says the new rules “sound very nice” but do not resolve the fundamental problems of poorly trained district administrators and a shortage of financial aid from Sacramento.

“I think people have to realize that with the state in trouble, school districts are working more on the edge,” she said. “The counties were given more oversight of school districts a few years ago, and that has not stopped superintendents or business managers from spending too much money.”

With all the performance requirements, she said, “school districts are in panic, and they spend money sometimes they don’t have on testing and such other things.”

Most of the districts on the watch list, including all the Southern California ones, have received “qualified certification,” which means that, based on projections, they might not meet their financial obligations for the current or coming fiscal years. The certification is based on information provided to the state in January, and is less severe than a “negative certification,” which is how Vallejo and eight other districts were categorized this year.

Today, state Controller Steve Westly will release an audit required when Sacramento took over management of the Oakland district.

McFadden said his staff recently studied 13 financially troubled districts and found common causes. “You had a poor-quality board, you had multiple leadership changes in the superintendent’s office,” he said, “and you had a collective bargaining agreement that pushed those districts into the corner in terms of what they could do and not do.”

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Schools on the financial brink

California schools at risk

The budgets of school districts in serious danger of financial collapse now total more than $1 billion.

*--* Districts Fiscal year in trouble Budget totals (In millions) ‘95-’96 1 $50 ‘96-’97 0 $0 ‘97-’98 1 $80.50 ‘98-’99 1 $0.50 ‘99-’00 3 $85.60 ‘00-’01 4 $54.70 ‘01-’02 6 $234 ‘02-’03 8 $661 ‘03-’04 9 $1,101

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*--* Annual budget Districts at serious risk County (In millions) Oakland Unified Alameda $417 Hayward Unified Alameda $174 Vallejo City Unified Solano $151 Antioch Unified Contra Costa $133 Livermore Valley Joint Unified Alameda $92 Berkeley Unified Alameda $91 Greenfield Union Elementary Monterey $17 Scotts Valley Unified Santa Cruz $17 West Fresno Elementary Fresno $9 Total $1,101

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Southland districts in a lesser degree of difficulty*

*--* Annual budget County (In millions) Santa Ana Unified Orange $499 El Rancho Unified Los Angeles $78 Westside Union Elementary Los Angeles $45 Rim of the World Unified San Bernardino $37 Fillmore Unified Ventura $26 All others combined $517 Total $1,202

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Source: State Department of Education

*31 districts elsewhere also fall into this category, called ‘qualified certification.’