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State takeover of school districts explained

By Theresa Harrington
Wednesday, June 30th, 2010 at 4:54 pm in California, Education, Mt. Diablo school district, Theresa Harrington.

By Theresa Harrington
Mt. Diablo school district Superintendent Steven Lawrence recently sent a memo to parents informing them the state could take over control of their schools if unions do not agree to furloughs and benefits cuts.
I called the state Department of Education to get clarification about this process and received an article written in 2009 by Joel Montero, who heads up the Fiscal Crisis and Management Assistance Team that works with struggling districts.
I am posting it below, with permission from School Services of California, Inc., which originally published the article Oct. 30, 2009.

“What State Receivership Means and Why It’s Best to Avoid It
[School Services of California, Inc. Editor’s Note: It is probably just coincidence, but we have had quite a number of inquiries recently about the consequences of just turning over the keys to the district to the state if the state doesn’t stop cutting education. Since the Fiscal Crisis and Management Assistance Team (FCMAT) has responsibility for assisting districts in their efforts to avoid or deal with financial problems, we asked Joel Montero, FCMAT’s Deputy Executive Officer, to author this article.]
Last spring (of 2009), California had the highest number of districts ever with qualified or negative certifications on their Second Interim budgets, reflecting the growing number of districts in fiscal distress. (Blog note: The number rose in 2010).
When a district gets to the point where it no longer has the cash to pay its bills, it must apply for a state loan, which means state receivership. Unfortunately, as a sign of the times, we have received many questions from districts about what state receivership looks like. What follows is some information on current law and, for a practical matter, what we have seen most recently in the districts that have required a state loan.
Budget Reserves vs. Cash Reserves
A school district receives a qualified or negative certification generally because of its inability to maintain the state-required level of reserves in all three years of its multiyear projections. Running out of reserves by itself, however, does not cause a school district to require a state loan; running out of cash does.
The distinction between reserve levels and cash levels becomes clearer when looking at your General Fund balance sheet. Reserves are the (hopefully positive) difference between assets and liabilities, some of which are cash and some of which are not. On the assets side, there are several cash accounts that are obviously cash—Cash in County Treasury, Cash in Bank, Cash with Fiscal Agent, etc. Not all cash is accessible to pay bills—for example, Cash with Fiscal Agent is set aside for a specific purpose and the district may not have the legal authority to draw on that cash to pay for operations. Other assets are not cash—for example, Stores Inventory and Prepaid Expenses. Most liabilities are not cash, but one notable exception is Deferred Revenues, since this represents cash that has been received by the district. It is set up as a liability because it cannot be recognized as revenue until it has been spent on the specific purpose of the grantor agency.
It has generally held true that low reserve levels are an indicator of low cash levels and vice versa. However, with the recent state cash deferrals, this has become less true. School districts with prudent reserves are still having to manage their cash actively and borrow to get through the negative cash months. And districts with inadequate reserves are having an even tougher time ensuring that the cash is there to meet the obligations when due.
Cash Borrowing Options
There are several options available to a school district to borrow cash locally—from its other funds, using tax and revenue anticipation notes (TRANs), from the county office of education, or from the county treasurer (Education Code Sections [E.C.] 42621, 42620). However, all of these options are temporary, short-term borrowing—they generally require that the district pay back the borrowing within a year or less. For each of these types of borrowing, the district is required to prepare a cash flow projection that indicates that the borrowing can be paid back from the district’s future revenues in the time frame required.
If the cash flow projection, however, shows that the district will be unable to pay back the local borrowing, it means that the cash balance is trending downward with no end in sight—that the future revenues are not enough to keep up with operational obligations plus pay back the borrowing. If the district is unable to borrow locally, then the only other option is to request a loan from the state.
State Loan
A loan (technically referred to in the Education Code as an emergency appropriation) from the state requires that one of the district’s local representatives to the State Legislature sponsor a bill through the legislative process. This is typically an urgency bill, meaning that it requires at least a two-thirds vote of each house of the Legislature so that it can become effective upon the Governor’s signature. The legislative process takes many months, so a state loan should be initiated early enough to ensure that the cash is there when the district needs it, and the timing needs to work within the legislative calendar. Typically, the bill has to be introduced in January in order to work its way through all of the legislative committees and the floors of both houses by the summer or early fall.
A loan from the state results in the state taking control of the school district. The degree of state control is determined by the size of the loan relative to the district’s budget. Specifically, per E.C. 41326(a), if the loan is less than twice the size of the district’s required reserve level, a State Trustee is assigned and assumes authority over the financial aspects of the school district’s activities. If the size of the loan exceeds twice the size of the district’s required reserve level, the following takes place:
• The school Board loses its powers and becomes advisory only [E.C. 41326(c)(1)]
• The Superintendent is no longer employed by the district [E.C. 41326(c)(2)]
• A State Administrator is assigned and assumes the powers of the Board and Superintendent [E.C. 41326(b)]
State loans are typically set up for repayment over 20 years. In both situations above, state control remains over the school district until the loan is fully repaid. The State Trustee or State Administrator reports directly to the Superintendent of Public Instruction—the state of California—not the local school Board or community.
The state loan is sized to accommodate the anticipated shortfall in cash that the district will need during the life of the loan in order to meet its obligations. In addition, all of the costs of ensuring a fiscal recovery are the responsibility of the district (E.C. 41328) and are added to the amount of the state loan. The cost of recovery when a State Administrator is assigned includes:
The cost of the compensation package for the State Administrator (E.C. 41326[(b)][(8)]
The cost of additional staffing as determined by the State Administrator to be necessary for ensuring fiscal recovery (E.C. 41326[(b)][(9)]
The cost of management reviews and developing a recovery plan, including the cost of the initial comprehensive review and follow-up reviews every six months encompassing these five areas of the district (E.C. 41327.1):
Community relations and governance
Pupil achievement
Financial management
Personnel management
Facilities management
Any other expenditures deemed necessary by the State Administrator to help ensure fiscal recovery
On the natural, a state loan will be much larger than what the district would otherwise need to borrow locally if it had been able to solve its own fiscal crisis. Therefore, a district that receives a state loan needs to make more expenditure cuts and/or take longer to pay the loan back.
The comprehensive review and six-month follow-up studies measure the district’s progress in meeting the standards established. In the areas where the district has progressed enough in meeting the standards, the Board receives its powers back and a Superintendent is hired to administer those areas. It normally takes several years before the Board regains any of its powers. State control remains, either in the form of a State Administrator or State Trustee, with stay or rescind power over certain Board actions until the state loan is paid off.
The State Administrator’s mission is to restore fiscal solvency as soon as possible so that the loan can be paid back to the state. This will be done by reducing expenditures to a level that is lower than revenues so that the reserves can be rebuilt over time while the state loan is being paid back. This means that all possible avenues for balancing the budget are pursued. The State Administrator cannot set aside any contractual obligations that the district has already entered into, including vendor contracts and bargaining unit contracts, without renegotiating them. If modifying provisions of these contracts is critical to gaining fiscal solvency, the State Administrator has the power to invoke the timelines available in the contracts or by law, including the ability to use the impasse/factfinding process to unilaterally impose changes in collective bargaining agreements.
Conclusion
A district in financial trouble will regain fiscal solvency. If the district and the Board, while it has the power, do not take the necessary actions locally to restore fiscal solvency, the same actions and more will be imposed by the state. The typical state loan is established to be a 20-year payback. The district remains under some level of state control until that payback is complete. Generally, recovery costs more and takes longer if a state loan is required.
In the long term, taking the necessary actions locally and avoiding a state loan will result in greater local control, less outside intervention, and better long-term outcomes for students, employees, and the community.
—Joel Montero
posted 10/20/2009″

I hope this answers some questions that have arisen in response to Lawrence’s memo.
Now, the Contra Costa County Office is reviewing the Mt. Diablo school district’s budget, said spokeswoman Peggy Marshburn.
“The county Office of Education has been monitoring the district’s financial condition for the past two years,” she said. “Based on careful consideration of their budget and subsequent interim reports, a decision will be made regarding the level of county Office of Education or possible state intervention.”
In a phone interview today, Lawrence said the district anticipates approving its first interim report by December.
“We created a budget that we just adopted,” he said. “But, it’s all based on the (governor’s) May revise, which is fiction, until the state adopts the budget.”
Meanwhile, the district is at impasse with two unions representing noncredentialed employees such as campus supervisors and maintenance workers. Deb Cooksey, lead negotiator for the district, told me the Clerical, Secretarial and Technical unit of Local 1 has contested its declaration of impasse and has filed an unfair practice action against the district.
The Personnel Employee Relations Board declared an impasse with the Maintenance and Operations (M&O) unit of Local 1, she said. A mediator has been assigned and she anticipates meeting soon.
“M&O Local 1 has said they don’t think the district is really at impasse and they’re still wanting to talk,” she said. “So, this will be our opportunity to talk with a mediator and hopefully resolve the difference.”
Mark York, executive director of the Mt. Diablo Education Association teachers’ union, told me the district has filed an unfair labor practices complaint against his bargaining unit.
“They claim that we persistently refused to bargain,” he said. “But, we told them that the authorization we have is to do a rollover (of our previous contract).”
The union surveyed its members regarding the district’s proposals and plans to come to the table in September.
The Mt. Diablo school district projects a small surplus in 2010-11, but it must make at least $12.2 million in ongoing cuts in its 2011-12 budget of $261.3 million to maintain fiscal solvency, according to its chief financial officer. Its required reserve is 2 percent.
Are you worried about a state takeover?

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  • Tired Parent

    The feds, the State and the former superintendent and board all had a hand in this mess. Everyone loses, no matter what we do.

  • Doctor J

    Supt. Lawrence is just trying a scare tactic to get the public riled up against the unions. What a crock of bull**** !

  • Teacher

    It says at the bottom of your log that MDUSD will experience a “small surplus” in 2010-2011. Did he tell parents that news or that the teachers are willing to go with the contract as it stands without any pay raises or anything added for the next three years? He also stated in board documents that he got input from parents and staff about reassigning principals. I think this might not be true. This is scary!

  • tharrington

    No, the superintendent’s message doesn’t mention the surplus projected for 2010-11 or the fact that teachers are willing to go with the contract as it stands now. He does mention the district is deficit-spending, but he fails to mention that the district has sufficient funds in 2010-11 to cover the deficit. Starting in 2011-12, however, the district must cut about $12 million to balance its budget.
    The district wants teachers to accept furlough days and benefits reductions. This is why it isn’t willing to “rollover” the current contract.
    The superintendent did seek input from parents and staff about some reassignments, such as the position at Mt. Diablo Elementary. However, he doesn’t appear to have sought input about others, such as his initial decision to transfer Bancroft principal Linda Schuler to Valle Verde or his decision to swap the Mt. Diablo and Olympic principals.

  • Realia

    Solo Steve has quickly proven himself to be a lying sack of something other than potatoes. Watch the Board eventually hand him a fat check to “voluntarily resign.” As for the Olympic/Mount swap, as a district teacher impacted by this, I can tell you staff at neither site is happy about this and of course neither site had an opportunity to participate in the so-called process. Mount is getting a principal who is absolutely unprofessional and in need of overdue mental health treatment (I’m not kidding-just ask around Oly), and Olympic is getting a principal who spent her last term at Mount incommunicado in her office after getting shaken up intervening in a student fight (one can Google her to learn of her adventures at her former district). A real win-win – on opposite day!

  • Doctor J

    @Reala Was the word you were searching for “manure” ? Bess Truman said it took her a long time to get Harry to use that word. :-)

  • Realia

    Well,we could use Harry T. or someone like him running the district now. Those supposedly running it now can’t seem to stand the heat from all the hot air they exhale!

  • Pragmatic Parent

    So, if the state takes over, here are the three biggest changes:

    • The school Board loses its powers and becomes advisory only [E.C. 41326(c)(1)]
    • The Superintendent is no longer employed by the district [E.C. 41326(c)(2)]
    • A State Administrator is assigned and assumes the powers of the Board and Superintendent [E.C. 41326(b)]

    Theresa, can you find out if the Board still receives its stipend and benefits, is the Superintendent outright fired or does he receive a golden parachute, and who pays the state administrator and what do they get pay and benefits-wise?

  • tharrington

    Based on the article posted above, the district must pay the state administrator. I’ve left messages with the state Dept. of Ed., Fiscal Crisis and Management Assistance Team, county office of ed. and the district to try to get the other answers for you.

  • Norm

    I think it would be great if the state were to take over. Somebody has to. Since we as parents don’t seem to have much say so in the performance of the MDUSD, and the quality of education suffers along with the morale of the employees it would be best if SOMEONE competent would.