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Extracted from Consolidated Report

This investigation was originally published as part of a larger consolidated report containing multiple investigations. View the consolidated PDF for the complete document.

Alameda County Grand Jury • 2002-2003

Alameda County Board of Education and Office of Education

Published: February 25, 2004 66 pages
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Findings 15 findings

F1 Page 40
The 1999/2000 FCMAT report placed all key players on notice of impending financial disaster for the OUSD and without substantial spending cuts the system would have major deficits. The report was explicit that OUSD was experiencing declining enrollment, and OUSD needed to monitor enrollment closely. In addition, the report was clear that the district was overestimating its ADA percentage and as such, was further overestimating its revenues. Finally, FCMAT explicitly warned that if not careful, the special education subsidies would be in the tens of millions of dollars.
F2 Page 40
The ACOE was specifically on notice. They knew the OUSD had difficulty closing its books in 1999 for the 1998/1999 year. They gave a qualified approval to the OUSD 40 2002-2003 ALAMEDA COUNTY CIVIL GRAND JURY FINAL REPORT____________ _______________________________ Education Committee 1999/2000 first interim in December 1999, indicating their serious concern with district finances. The FCMAT report should have given them even greater concern. Finally, the ACOE was well aware of the enormous turnover in OUSD financial management with different financial leadership in each of the 1999/2000, 2000/2001, and 2001/2002 fiscal years. This turnover, in itself, should have triggered heightened oversight.
F3 Page 41
The OUSD Multi-Year Projections 2001-2006 report issued in early 2001 made clear the financial situation of OUSD needed immediate attention. The report did not have to be read carefully. The report was printed in color and projected deficits were displayed in red numbers and were clearly visible even for those unable or unwilling to study the details of the report. The report showed the likelihood of large deficits if appropriate actions were not taken.
F4 Page 41
The board delay in purchasing the new computer system cost the district a year in making the changeover. This meant the new system was not operational until July 2002, the beginning of the 2002/2003 year. Had the system been purchased more expeditiously, the fiscal crisis might have been realized a year sooner.
F5 Page 41
Grand Jury interviews indicated that the old computer system, however cumbersome, did provide relevant data. Rigorous analysis of the data from the old system would have produced useful results. The new system made seeing problems easier, but its absence cannot be seen as an acceptable excuse for OUSD fiscal mismanagement.
F6 Page 41
The teacher salary increase may have been necessary to retain teachers and to replace the 500 or so emergency credentialed teachers with fully credentialed teachers. The issue is not whether the teachers deserved the raise, or whether the raise was necessary to forestall a strike; rather, that paying for the $40+ million per year increase required substantial cuts in other parts of the system. These substantial cuts were not implemented by the board and superintendent. 41 2002-2003 ALAMEDA COUNTY CIVIL GRAND JURY FINAL REPORT____________ _______________________________ Education Committee
F7 Page 42
The separation of the various financial departments into isolated enclaves, with little information passed between them, was a recipe for disaster. This isolation was partly responsible for the use of budget estimates, rather than actual spending and revenue data, as the basis for financial reports. This seriously compromised both the internal OUSD control and external oversight systems. Data labeled as “actuals” must be the actual data and must be continually tested for what that partial year spending means for projecting the full year’s costs. The Grand Jury did not determine whether the false data occurred by intent or by negligence. It defies belief that neither OUSD nor ACOE discovered the problem.
F8 Page 42
The increased salaries allowed OUSD to replace emergency credentialed teachers with fully credentialed teachers. This reduced vacancies and also had the predictable impact of radically increasing the total salary bill. Somehow there was no budget for these additional costs.
F9 Page 42
Some of those interviewed pointed accusatory fingers at the Human Resources (HR) department for hiring people without budgeted positions being available. The Grand Jury found that HR was tasked with hiring new credentialed staff to replace those on emergency credentials. They were successful in doing so. The problem was that HR did not require each hire to be properly accounted for in all parts of the financial system or for those separate departments to even coordinate vacancies and hiring.
F10 Page 42
The school board is ultimately responsible for the OUSD. The board was on notice from both the FCMAT and MYP reports that finances were tight and major cuts were required. The board members should have asked more questions and demanded better answers. Had the board done even the most basic calculations, they would have seen that with salary increases of 24%, increases in special education encroachment, and declining 42 2002-2003 ALAMEDA COUNTY CIVIL GRAND JURY FINAL REPORT____________ _______________________________ Education Committee revenue, that the OUSD would not have been able to balance their budget. However, board members are, for the most part, not financial people. Without staff of their own to independently review district finances, it is not realistic to expect the board to do its own rigorous financial analysis. Nevertheless, the OUSD board could have required OUSD staff to provide simple spreadsheets showing how enrollment was meeting budget estimates, and whether salary increases were being offset by spending reductions.
F11 Page 43
The OUSD superintendent was able to take a dysfunctional district and institute important educational changes in a relatively short time. In addition, he constantly asked his financial staff whether the budgets were balanced and was repeatedly assured that everything was in order. These reassurances were all the more credible given the positive ACOE certifications and the KPMG audit. It can plausibly be argued that he did everything a superintendent could be expected to do without being his own chief financial officer. Nevertheless, the superintendent is the person ultimately responsible for the operation of the OUSD. When serious problems arise he must be held accountable.
F12 Page 43
It is not credible that OUSD first “discovered” the deficit problem when the new computer system was activated. More likely, the new system indicated the sheer magnitude of the deficit. The deputy superintendent was on notice from both the FCMAT and MYP reports of the precarious state of OUSD finances. Moreover, he was aware of the declining enrollment (and its financial costs) from his October 2001, attendance reports, which resulted in his declaring spending moratoriums in November
F13 Page 44
The Grand Jury found that there was a difference of opinion as to whether the generally applauded OUSD reforms could have taken place without budget deficits. Some argued that absent greatly increased teacher spending the reforms would not have taken place. The increase in teacher salaries resulted in more certified teachers being in the system. Others argued that had they known the true nature of the deficits, they could have acted sooner to reduce spending without seriously jeopardizing the reforms.
F14 Page 44
The Grand Jury learned that COEs are empowered to intervene much earlier and more aggressively than stated by the ACOE. Moreover, the Grand Jury was informed that the ACOE is considered to be in the bottom 25% of aggressiveness of COEs in the state. Under AB1200, the ACOE is clearly empowered to intervene whenever it suspects problems. The ACOE argument that they did everything they could under the law is not acceptable. The ACOE did not need the OUSD financial system on the ACOE computer to request detailed data. The ACOE was aware, and made OUSD explicitly aware, of the problems and impact of declining enrollment. They knew that OUSD was deficit spending. They could easily calculate (or require OUSD to calculate) the cost impacts of the salary increase. They were under no obligation to take the OUSD numbers at face value. Even assuming that OUSD was simply in error (and not deliberately falsifying its books), they had an obligation to help OUSD be clear where they stood financially. 44 2002-2003 ALAMEDA COUNTY CIVIL GRAND JURY FINAL REPORT____________ _______________________________ Education Committee ACOE gave a qualified certification for the 1999/2000 first interim report. They could have done the same in 2001/2002 when they strongly suspected OUSD problems. If the ACOE suspected OUSD financial data was incorrect, ACOE had an obligation to request detailed proof to the contrary. The Grand Jury learned that the previous deputy superintendent, while at the ACOE, would drop into district offices and demand to see actual data. In addition, he kept spreadsheets of 5 years’ history of critical budget and enrollment data. It is up to the school districts to satisfy the COE of their financial health. Without that, the COE can give them a qualified rating until they provide sufficient information to satisfy the COE. This is reflected in data available from the state of California, in records of discussions on AB1200, and the subsequent AB139, which clarifies and strengthens the role of the COE.
F15 Page 45
The real tragedy, and the primary failing in oversight, is that the 2001/2002 problems weren't caught sooner. Precarious school district finances can turn negative very quickly. Given the difficulty of reducing spending in the major spending category, teachers salaries, during a particular year, it is understandable that there was a large deficit in one school year. What is unconscionable is that the situation was allowed to roll over to the 2002/2003 year. It took much too long to identify the problems, and even longer to begin solving them. CONCLUSION The system for financing public school districts requires overhaul. Districts throughout the state and throughout Alameda County are in serious financial difficulty with many facing financial disaster. However, inadequate funding is not an excuse for failure to operate within those constraints. Similarly, it is not an excuse for those tasked with providing oversight, and who do not act proactively or aggressively until a crisis has gotten out of hand. 45 2002-2003 ALAMEDA COUNTY CIVIL GRAND JURY FINAL REPORT____________ _______________________________ Education Committee More specifically:

Recommendations 2