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Mt. Diablo district is running out of cash

By Theresa Harrington
Tuesday, July 13th, 2010 at 8:42 pm in Concord, Education, Mt. Diablo school district, Theresa Harrington.

By Theresa Harrington
When Mt. Diablo district Superintendent Steven Lawrence sent a memo to parents warning about the possibility of a state takeover last month, I was surprised, because the the 2010-11 budget has a positive ending balance, according to district projections.
But when I spoke to the chief business official for the Contra Costa County Office of Education a few days ago, he confirmed that Mt. Diablo’s budget is worse than it initially looks on paper.
Unlike most districts, Mt. Diablo borrowed money in the middle of the school year to cover its cash requirement, through a loan called a “TRANS,” he said.
“Basically, you’re going to your creditor, saying ‘I need cash to close my books for the end of the year or I’m not going to have enough money to make my payroll,” he said. “It’s short-term borrowing. It’s like you drawing down your credit card.”
To help remedy this problem, the county office has suggested the district accept advice from a county-appointed fiscal adviser.
“They’ve acknowleged to us that it might be important, but we’ve never made the decision to appoint the adviser,” Clark said. “Mt. Diablo’s a large complex district and there’s a lot of considerations that they have to look at. That’s a major step for them. They’ve basically taken that under serious consideration during the last six months.”
The district would pay 75 percent of the cost for such an adviser and the Fiscal Crisis Management Assistance Team would pay 25 percent, Clark said.
“In Mt. Diablo’s case, we’ll probably submit very specific requests for additional (budget) information, then we’ll move forward to appoint (an adviser),” he said. “It really depends on how realistic their proposed reductions are, but my sense is that by fall, we’ll probably have one appointed.”
He agreed with Lawrence’s assessment that state takeover is a very real possibility.
“If they had to do a mid-year TRANS and they’re running out of cash, that’s one of the most telling indicators that they’re in financial trouble,” Clark said. “A mid-year TRANS is very new. Short-term borrowing is common in the fall or spring, but to borrow at the end of the fiscal year is not a common event.”
The John Swett district, he said, is in even more dire straits.
Still, the Mt. Diablo district filed a “positive” certification with its second-interim budget through Jan. 31, which assumed approximately $9.8 million in 2009-10 and subsequent year reductions that require labor negotiations, according to a letter the Clark wrote to Board President Paul Strange in April.
“It is our understanding that these assumed reductions may not materialize due to little or no progress with negotiations,” Clark wrote. “Our office would question the district’s positive certification should the district fail to meet targeted reductions.”
Clark said he sits on a state committee of county chief business officials that prepares guidance for districts throughout the state.
This committee has noticed that many districts are including cuts in their budgets that haven’t yet been implemented, yet declaring their budgets to be positive, meaning they will be able to pay their bills.
Some other districts, however, have self-certified their budgets as “qualified” or “negative,” because they haven’t yet implemented necessary cuts.
This means a “positive” certification in one district could be essentially the same as a “qualified” certification in another, making it difficult to compare “apples to apples” when looking at budgets.
To make each district’s budget situation clearer, the committee decided to require each school board to submit a “Resolution of Maintenance of Fiscal Solvency” with its three-year 2010-11, 2011-12 and 2012-13 budget projections, Clark said.
“The school board is to make a public commitment to those reductions,” he said. “They need to do those things to maintain fiscal solvency.”
Mt. Diablo’s resolution states that the district needs to make at least $12.1 million in ongoing cuts in 2011-12, plus another $6.5 million in ongoing cuts in 2012-13. The board must decide how to make these reductions by the end of this year.
Now, county offices of education throughout the state are reviewing district budgets. They will decide to approve of disapprove the budgets by mid-August.
Clark noted that the John Swett district self-certified its second interim report as negative, because it must make cuts to stay afloat. Likewise, the Antioch, Knightsen, Martinez, San Ramon and West Contra Costa districts self-certified their second interim budgets as “qualified,” meaning they may need to make more cuts.
“The districts take different positions or they approach the certification process differently based on their philosophy,” he said. “They have some ability to address their multi-year (projections) through assumed reductions. If they’re close, they can push to positive or qualified. Some are adamant that they’re going to be positive. A lot of that is influenced by the local climate.”
This means politics comes into play. To get past the semantics, Clark said he hones in on certain lines in the budget that give him a clear indication about whether a district is in financial trouble.
“You look at things like their cash balances and you look at the rate of their deficit,” he said. “The first thing I look at is: what is the deficit? How much are they overspending? Then I also look at: what is their cash position? If they’re running out of cash, that means they are in trouble.”
I asked him to tell me exactly where to look in the district’s 187-page budget to find the answers to these questions. He directed me to the “net increase or decrease” in the general fund balance on page 2 of the General Fund report, line E.
“If that number is bracketed,” he said, “it means expenditures are exceeding their current year estimates.”
He cautioned against a “trend of brackets” on that line. Mt. Diablo has a line of brackets, showing (26.5 million) in 2009-10 and ($12.1 million) in 2010-11.
Next, Clark looks at the available “Fund Balance” and reserves on Line F (just below line E). This shows their savings and how fast they’re spending down their reserves, if they’re overspending, he said.
Mt. Diablo’s July 1, 2009 fund balance of $47.2 million shrank to $20.6 million by June 30, 2010. By June 30, 2011, this is expected to dwindle to $8.5 million.
Then, Clark looks at how much cash the district has, on line G, along with its liabilities. Mt. Diablo shows $78.1 million in assets and nearly $30.9 million in liabilities, leaving it with $47.2 million by June 30, 2010.
Finally Clark looks at the multi-year projections (pages 146-147), lines E and F, along with the reserve amount “designated for economic uncertainties.”
Mt. Diablo shows an $6.3 million in “total available reserves” for 2010-11, which slips to negative $5.2 million in 2011-12 and plummets to negative $23.9 million in 2012-13.
“You could have a fund balance that shows you’re in fairly decent shape, and you can run out of cash,” Clark said. “Game over. Because you cannot make your payroll.”
Do you think the Mt. Diablo district should request a county-appointed fiscal adviser?

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  • Doctor J

    YES. The irony is that Richards is one of the Gang of Five that got the hefty raise in November in the middle of the financial crisis, along with the lawyer. Yet, the county for six months has recommended the financial advisor — undisclosed to the public — and instead they give a hefty raise to the GANG of FIVE. What hypocrisy ! What poor management ! Why hasn’t the Board disclosed to the public ” the county office has suggested the district accept advice from a county-appointed fiscal adviser” ????
    What else is the Board hiding ?

  • Kathleen

    MDUSD has needed a decent fiscal advisor since before Gamblin was in this district. I believe the problems have gone back that far. I’m tired of seeing the district try shuffle after shuffle to change the numbers to see what looks good. I don’t agree that taking a glance at just part of the budget is a very sound either. I agree with Dr. J. What is behind the curtain in fiscal?

  • tharrington

    Another indication of a cash flow problem: Richards told me today that the district used more than $11 million of its $13.2 million federal State Fiscal Stabilization Fund (SFSF) money for payroll in November. It paid the salaries of unrestricted general fund employees except for the central management functions and the central maintenance and operations functions, he said.
    “One month of everybody,” he said.
    The district will close its 2009-10 fiscal year with all of the SFSF money “fully expended,” he added.

  • Doctor J

    They were broke in November and still gave the Gang of Five raises that same month, including the accountant and lawyer ! The ultimate hypocrisy — spending 90% of the stimulus money on themselves and then giving themselves raises. Even more reason the Board should resign in disgrace. Have they lost their moral compass ?