Response of Sacramento City Unified School District to the

The Sacramento City Unified School District Board of Education did not fully explore, question nor understand the joint powers proposal presented by the Chief Financial Officer (CFO) and supported by the Superintendent. Response to Finding 1: Partially Disagree with Finding. The Board did explore the proposal presented by the CFO and supported by the Superintendent. Several staff memoranda and presentations were prepared on the subject of the proposed JPA and its alternative pension plan. Throughout this process, the Board was continually reassured by its outside independent legal counsel and consultants that the proposed system was legal, that another public school district had already implemented a similar system and that the entire concept was cost and revenue neutral to the District because the District would only be redirecting money that it was otherwise already obligated to pay. On March 6, 2000, before the Board approved the formation of CASA, it held a public meeting where the subject of the formation of a JPA was placed on the agenda as a discussion item. The District's outside legal counsel and CFO publicly presented the concept of CASA and discussion ensued. When presenting the features of the proposed JPA, David Girard, then outside counsel for the District, represented to the Board that "We would make sure that it is legally valid, fiscally sound, . . . and cost neutral to the District at least." Although the Board did explore and question the proposal for creation of a joint powers authority, in hindsight it is now apparent that the Board was presented misleading and inaccurate information (see Finding 5 below), causing the Board not to fully understand the risks and financial exposure to the District.

In approving the JPA, the Board authorized transfer of district classified employees to CASA. Response to Finding 2: Agree with Finding - With Clarification. The joint powers agreement was an agreement between the District and Yolo County Office of Education and did not authorize the transfer of employees to CASA. After the JPA was formed, the District approved an operating agreement between the District and CASA. The operating agreement authorized an unpaid leave of absence for certain classified employees who wanted to become CASA employees. The individual employees were not "transferred" but were instead empowered to choose whether to remain in their existing status or take a leave of absence to join CASA.

The SCUSD Board, once CASA was established, paid little attention to issues of oversight and management of the JPA. For example: a. The Board did not appoint representatives to the CASA board but delegated the selection to the Superintendent. b. The Board did not require periodic reports or yearly audits of CASA. c. The Board allowed CASA bylaws to be amended without approval. d. The Board allowed the CFO to assume the position of Executive Director of CASA while serving concurrently as the District CFO. Response to Finding 3: Partially Disagree With Finding. The Board believed that it was exercising oversight and management of CASA through its trusted administrative staff. As the grand jury recognized in its Final Report, "[i]nasmuch as Board members make decisions in complex areas, they depend on district administrative staff for advice and recommendations . . .." The District's senior administrative staff, including its Deputy Superintendent and Chief Financial Officer, Laura Bruno, and the District's outside counsel, Girard & Vinson, were heavily involved in the creation and operation of CASA. The Board trusted that these professionals would faithfully perform their duties and disclose to the Board any problems or risks associated with CASA or management of the JPA. Response to Finding 3(a): Agree with Finding. Selection of the original representatives was delegated to the former Superintendent. However, once the Board became aware of problems with CASA it became directly involved in the selection process and remains so to this day. Response to Finding 3(b): Disagree with Finding. During the open session of the March 6, 2000 District Board meeting, the District's counsel, David Girard, presented the conceptual framework of CASA to the Board, seeking direction on whether to proceed with finalizing the formative documents. During this presentation the Board specifically requested an annual audit requirement and periodic reporting to the District Board. The Board's request was carried out as reflected in both the District's operating agreement with CASA and CASA's Bylaws. The operating agreement between the District and CASA requires that CASA conduct an audit of itself and its pension plan. (Operating Agreement & 2.C.(1).) CASA's Bylaws require CASA to "Provide within one hundred twenty (120) days after the close of each fiscal year, a complete written report of all financial activities for such fiscal year for each Program to each Member of the [CASA] Board of Directors and to the Chief Administrative Officer of each Member of the Authority." (Bylaws & K.2.G.) CASA's Bylaws further provide that CASA must retain a certified public accountant to conduct an independent annual audit of the accounts, records and financial affairs of the Authority and that a report of the audit be submitted to each Member of the Authority. (Bylaws & K.2.H.) These independent audits were in fact performed by an outside CPA for the fiscal years ending in 2001 and 2002 and indicated that CASA was a financially stable agency. The audit for fiscal year ending June 2003 has been initiated but has not been completed. Response to Finding 3(c): Agree in Principle with Finding. It is true that the Board did not formally ratify or approve changes to CASA's Bylaws. According to the provisions of the Bylaws, the Bylaws could be amended by a two-thirds vote of the CASA Board of Directors. The District's governing Board trusted that its appointees to the CASA Board and the District's administrative staff working with CASA would review any proposed changes to the Bylaws and would not approve changes that were adverse to the District's interests. Once the Board became aware of problems with CASA, it became directly involved in the selection process for District appointees to the CASA Board and remains so to this day. Response to Finding 3(d): Agree with Finding. It is common for employees of public agencies to also serve as officers or administrative staff of a JPA of which the agency is a member. This practice is cost efficient for financially strained local public agencies.

The Board opted to reward its three contract employees (Superintendent, Chief Financial Officer, Legal Counsel) by giving them inflated retirement benefits. For example: a. Granting 10 additional years of service credit which was excessive and unprecedented for public service positions. b. Granting mileage allowances, travel expenses, and vacation pay to be included in the final compensation calculation for retirement was inappropriate. Response to Finding 4: Agree in Principle with Finding. The Board did agree to provide the former Superintendent (in recognition that there had been a pay differential with other superintendents), CFO and General Counsel with increased retirement benefits and alignment of their contract termination dates, but only with the express understanding that there would be no additional cost to the District. This was done as part of the normal process for reviewing and updating an employment contract. Response to Finding 4(a): Agree with Finding - With Clarification. The Board was never informed of the magnitude of the compensation increases granted and in fact was misled to believe that the compensation packages granted to these former employees were within the norm for similar public school districts. Also, current information indicates that the compensation increases would not be cost neutral to the District and this automatically nullifies the provision of the enhanced benefits. The Board has directed its attorneys to void or otherwise extinguish the ten years of service credit granted to these former employees and is working with CalPERS to ensure that elements of reported compensation comply with applicable statutes and regulations. Response to Finding 4(b): Partially Disagree with Finding. Under the terms of the contracts for the employees at issue, they receive a base salary, a portion of which is deferred through a Flex 125 plan for the employee to allocate between various health benefits, and an allowance for expenses that is part of compensation and retirement creditable. Prior to the creation of CASA and throughout the CASA years, CalPERS and CASA retirement contributions (depending on which year is at issue) from both the District and the contracted employees were paid on the total amount of compensation, including the amount deferred through the Flex 125 plan and the expense allowance. This is also true for all certificated and classified management who have part of their compensation deferred through the Flex 125 plan. The issue of whether the compensation deferred through the Flex 125 plan could be pension creditable arose with CalPERS a number of years prior to formation of CASA. CalPERS audited the District and approved these funds being included in retirement creditable salary. Including the deferred compensation and the expense stipend in pension creditable salary was intended to be a continuation of past practice. Although the former Superintendent initially sought to convert vacation pay into final salary, this was ultimately not accomplished and vacation compensation was not included in the final compensation reported to CASA upon retirement. The District's General Counsel never sought a conversion of vacation pay to final salary. Only one employee, the former CFO, was allowed to include vacation pay in final compensation. The District is working with CalPERS to correct this issue.

The CFO and the outside consultants she selected appeared to mislead the Board with incomplete information and strong assurances of cost neutrality of the CASA plan. Response to Finding 5: Agree with Finding. The former CFO has retired and the District has severed its relationship with the numerous consultants who advised the District on the formation and operation of CASA, except that former outside counsel is completing a few totally unrelated litigation matters, where substitution at this point would be uneconomic.

The Board authorized the issuance of an unnecessary $6.5 million pension obligation bond and incurred financial liability with little or no discussion or understanding of the possible financial impact to the District. The $420,709 cost to issue the bond could have been applied to educational purposes. Response to Finding 6: Disagree with Finding. The District relied upon its trusted staff and its independent consultants to properly analyze this very complicated financial transaction. The District's financial advisors, Northcross, Hill and Ach, were serving as financial advisors and underwriter for the CASA bond issuance. The District's bond counsel, Jones Hall, were serving as CASA's bond counsel. The District's outside counsel, Girard & Vinson, were advising both CASA and the District. None of these professionals ever told the Board that their loyalties ran exclusively to CASA with respect to the bond transaction. None of these professionals ever indicated that representations by District staff regarding cost and revenue neutrality were false or incorrect. Rather, the Board was assured that the District's financial responsibility under both the bonds and the loan agreement was no greater than what the District would already owe in the absence of the bonds. In a November 27, 2001 memorandum from the Deputy Superintendent/CFO to the Board, regarding the proposed bond issuance and loan agreement, the CFO discussed the District's obligations and concluded that "the district's obligations under the bonds are no greater than they would be without the bonds." The same memorandum, when discussing the financial impact on the District of issuing the bonds, concluded that: "The issuance of the bonds will cause no increase in the employer contributions required from the district to fund the pension program. Debt service will be paid from the current level of contribution (about $l.5 million per year) to fund the program." Thus, the Board was led to believe that all costs associated with the bonds and the loan agreement would be paid by CASA out of the District's existing contribution of 19.22% of covered payroll. Additionally, the December 3, 2001 staff memorandum presented to the Board in support of the proposed resolution authorizing borrowing of the funds and execution of the loan agreement assured the Board that there would be no financial effect on the District. The memorandum stated: "This borrowing will not increase the district's costs because the loan repayments will be made out of funds that the district is currently paying to the Retirement Plan on an annual basis." Staff memoranda in support of Board resolutions were required to follow a specific format that included a discussion and explanation of any financial considerations to the District. This section of the December 3, 2001 memorandum clearly indicated that approval of the loan agreement had no financial implications for the District. "Financial Considerations: None."

The Board of Education and top administrators were dismissive of community concerns regarding the JPA and CASA. Response to Finding 7: Partially Disagree with Finding. While certain administrators may have appeared dismissive of community concerns regarding CASA, the Board took those concerns very seriously. On November 18, 2002 the Board held a public meeting to respond to questions about CASA. The District's administration, with the assistance of its consultants, made a detailed presentation on the operation of CASA and the CASA bond issuance. Presentations were made by the District's legal counsel, Girard & Vinson, Arnold Bray from School Services of California, CASA's actuary, Robert Dezube, the District's underwriter and financial advisor, Mark Northcross, and CASA's pension expert, Ralph Amadio. At the November 18, 2002 meeting, the presentations by both the District's outside consultants and CASA's outside consultants were very convincing and reassured the Board that CASA was a legal and viable entity. For example, the District's legal counsel, David Girard, stated that: "Everything that CASA is, or CASA will do, was presented to the court and the court ruled that these proceedings were valid and those activities which CASA intended to take were proper." Thus, the Board and all the members of the public in attendance at that meeting were told that the court had already reviewed the issues and determined CASA's operations to be proper. Less than a year after the November 18, 2002 meeting, concerns were again raised about the operation of CASA. When these concerns were raised with the new Interim Superintendent in July, 2002, he promptly began a diligent search for a qualified external auditor. After FCMAT declined to provide such assistance, the new Interim Superintendent eventually found and recommended MGT of America, and the Board retained MGT, to perform an independent fiscal and programmatic review of CASA. The Board also retained the law firm of Lozano Smith to perform an independent review of certain legal issues raised by the public and MGT. RESPONSE TO RECOMMENDATIONS TO THE BOARD OF EDUCATION: