Vibrant School District Starved by State

By Leslie Layton

Some California school districts have gone broke because of gross mismanagement. Some have gone broke on fraud and corruption. The Chico Unified School District has gone broke on good intentions and a crashing state economy.

You could argue that it went broke by providing what parents in this college town wanted, even when the district could no longer afford those amenities. It offered small primary school classes and high school electives like French IV and ran tiny schools in the nearby communities of Cohasset and Forest Ranch.

You could argue that it went broke giving raises to teachers after the union fought bitterly for what it considered a fair collective bargaining agreement in 2006. Or that it went broke because a former superintendent foolishly gambled on an effort to boost the attendance rate and overestimated income by $1.1 million for a two-year period.

But by late 2008, it seemed it had recovered its footing by slashing millions of dollars from its budget. Then it discovered the system had been rigged against it. A bankrupt state of California slashed funding earlier this year by almost 19 percent and delayed payment on 25 percent of what remained. Ultimately, CUSD went broke because it didn’t have the savings to sustain a $14-million hit.

Now, one of the largest school districts in the northern Sacramento Valley faces a possible state takeover. A district that serves 12,318 students, CUSD says it may not have enough cash to make its $8-million monthly payroll by August 2010. The state Fiscal Crisis & Management Assistance Team on Oct. 25 declared a “fiscal emergency” in the district, the first step in a process needed for it to obtain a pricey credit line.

Chico Unified may be the iceberg’s tip, say educators, at the crest of what will be a wave of school-district insolvencies. According to a legislative analyst contacted for this story, 19 districts were on a watch list earlier in the year because they were in danger of going broke.

Eight California school districts have gone broke in recent years and been taken over by the state; most of them were urban districts in Oakland, Compton and other large cities. But the first to go broke in the wake of state funding cuts was a small district in King City south of Salinas. In Willows, the school district is on the verge of financial collapse.

“Insolvency is becoming a small, rural issue, while in the past it was mostly a large urban issue reflecting dysfunction,” said Joel Montero, CEO of the state Fiscal Crisis team. At an Oct. 21 school board meeting in Chico, Montero conceded that the law requiring state takeovers of bankrupt schools was written to get mismanaged districts back on track.

But the story of Chico Unified’s financial collapse, say district officials, is the story of a public school system that went broke trying to serve its community. Within a year, a district that has won accolades for innovation and excellence could become an example of how quickly a public-school system can be dismantled.

According to CUSD, 104 California school districts are depleting their reserves and in danger of entering a deficit-spending cycle like the one that got it into so much trouble.

Chico Unified — like about half of California’s districts — struggles with enrollment decline that cuts into funding known as “ADA” based on average daily student attendance. It has lost 1,763 students over the past decade, most to changing demographics and family relocation, but some to charter schools.

“Chico got caught in a perfect storm” of state funding cutbacks, enrollment decline and its own administrative turmoil, said Kevin Bultema, the assistant superintendent in the Butte County Office of Education. “With declining enrollment, you have to be cutting ahead of the curve, which is difficult to do.”

If the state bails out Chico Unified, Superintendent Kelly Staley would be fired, a state administrator would run the district for several years, and CUSD would be in debt to the state for the next 20 years. To get the district in the black, the state administrator would cut costs, perhaps obliterating what remains of music, art and athletics, and could impose salary and benefit rollbacks on employee groups if contract negotiations stall.

The state would provide a credit line to CUSD by selling bonds through its infrastructure bank and charging the district the market interest rate. In addition to the face-value cost of the loan, the district would also be stuck with a 30 percent financing cost, said Assistant Superintendent of Business Services Jan Combes.

To escape such debt and the loss of local control, CUSD hopes to reach an agreement with its unions that will roll back salaries for all or most employees, and save enough to plug a deficit estimated at $6 million a year. It’s proposed what it calls a “fair share model”; the teachers’ portion alone would save the district $3.88 million a year.

“We’re asking that everyone take an equal step backwards so that we don’t have to look at positions and programs,” Combes said. But if there’s another round of funding cuts in the coming year, the district may have to lay off counselors, nurses and librarians and look at “things we’ve always held sacred,” she warned.

The most immediate obstacle will be the district’s relationship with the teachers union, one that has often been characterized by distrust and rancor. The district says it presented a contract proposal to the Chico Unified Teachers Association Oct. 15 that would cut teacher pay by 5 percent and freeze step increases for two years, but hasn’t succeeded in opening negotiations.

CUTA says it’s following the prescribed procedure, conducting a bargaining survey of some 600 members. The union’s Web site accuses the district of “fiscal mismanagement” and “misplaced priorities.” Union leaders have fumed for several years over what they view as teacher overstaffing that they say has cut into the district’s ability to give pay raises.

Jim Williams, bargaining chair for CUTA, said he’s not yet sure whether the drastic pay cuts are necessary, in spite of ominous warnings from Combes, the county, and even the state Fiscal Crisis & Management Team.

“We know they have a problem,” Williams said, “but I don’t think the sky is falling. For years, we’ve been told they’re in dire financial condition. They come to the table saying they’re broke. So now, they’re saying they’re in this condition, and there are some arched eyebrows.”

CUSD Board President Jann Reed says the union is “posturing.”

“It’s a game, and they’re good at it,” Reed said. “Nobody but the union questions whether this is a crisis. We’re running out of time – our cash flow will be depleted by August.”

At a Nov. 18 board meeting, district officials concurred. Combes gave a harrowing assessment, showing that by September 2010 the district could have a $513,000 cash deficit that would climb to $7.2 million by end year. And that doesn’t consider mid-year spending cuts by the state that could still be coming.

“The sooner we know what our budget looks like,” said Assistant Superintendent of Human Resources Bob Feaster, “the more likely we will be able to stave off state receivership.”

CUSD soon begins preparing legislation that will be introduced in January that will get it a state bail-out if contract negotiations fail to produce the needed results.

To get through this month, the district will resort to inter-fund borrowing to meet its cash needs. The district will use $1.5 million from its developer-fee fund that can be replaced when it receives its share of property tax revenue in December.

Good Intentions

When Combes was hired in October 2007 from a school district in Hayward that she had helped become solvent, she wasn’t sure where to look for the cause of CUSD’s deficit spending.

“My first three or four weeks here, I was going down the hall and saying [to colleagues] ‘Can we do this?’ It would turn out that it was already being done. You know what to look for when you’re trying to save a school district, but everything in our book of tricks was being done.”

What she found surprised her. There were no signs of fraud or significant waste. Instead, she found a district that was, as she puts it, “program rich,” or as the union puts it, “overstaffed.”

The district was offering an array of programs, including its Two-Way Immersion in Spanish and English at two elementary schools. It was hanging on to its 20-1 student-teacher ratio in kindergarten through third grade, even for combined third-fourth grade classes.

Combes says she found the root of Chico Unified’s budget deficit in the district’s “culture.”

“The district for many years had tried to meet every community need,” Combes said. “It was doing nice things, but they were not things a district that’s not fiscally sound would do.”

There were elective classes like journalism that had only 10 or 15 students. There was the Cohasset elementary school that had only about 40 students. The cuts required hard decisions that inflamed community groups and kept board meetings packed with protesting parents and students.

And ironically, what the union calls “fiscal mismanagement” is sometimes traced back to a December 2006 collective bargaining agreement that gave teachers a raise of 11 percent over a three-year period. “It was a raise we couldn’t afford,” Combes said flatly.

Faulty Assumptions

The 2006 contract marked a turning point for Chico Unified. The board immediately set to work to pare the district’s budget, cutting several million from expenditures over the next couple of years to finance the pay raise and keep up with declining enrollment.

But it wouldn’t be enough; the contract was founded on what Combes calls a pair of “faulty assumptions.”

The district, then under the direction of Superintendent Chet Francisco, had based an income projection on an attendance rate that proved to be 1 percent higher than the figure that had been previously used and higher than what would occur.

Francisco, who resigned in June 2007, couldn’t be reached for comment on this story. But Feaster, who worked under Francisco, defended his former boss as an administrator who “cared deeply” about Chico students. “From the get-go, he [Francisco] believed we could improve attendance,” Feaster said. “He even went around to the schools and talked with attendance clerks to get ideas.”

A second faulty assumption was based on the belief that state funding was a stable revenue source; in fact, the pot of money known as COLA – cost of living adjustment funding – had been growing. But the state began cutting its funding to schools in 2009. “It just fell off the cliff,” says Bultema, the Butte County Office of Education official.

The teachers union had come to bargaining sessions in 2006 in a combative mood, convinced it had a right to a COLA-funded cost-of-living raise. It had been four years since it had a won a raise for its members. And the previous raise had been given only after a tough collective bargaining battle and teacher picketing.

On Dec. 6, 2006, Francisco bought the district labor peace. The district and the union settled on the three-year contract. Because the district’s “faulty assumptions” didn’t look faulty on paper, Combes says the assumptions helped convince Francisco, the board and even the county education officials who approved CUSD’s budget that the raise was affordable. The last 3 percent of that raise was given in January 2008.

“We trusted that our superintendent with 18 years of experience knew how to do this,” Reed said in reference to income projections. “After [he] left, the house of cards fell; it left us in a precarious situation.”

Trustee Andrea Lerner Thompson said the board has learned from mistakes, though she doesn’t think there’s been enough owning up. “I don’t know if as a school district and board that we have taken much responsibility for the situation we’re in,” she said. “We made some wrong calls.”

In summer 2007, the Butte County Office of Education intervened, giving CUSD only “qualified” budget approval and warning that it was dipping dangerously into its reserves.

A new administration

Kelly Staley became superintendent in late 2007, aware that she would have a tough job balancing the budget in a district that had already been cutting for several years. That was before the state budget meltdown.

CUSD had stomped out most of its deficit by the end of 2008. Its reserves were almost at 3 percent of its total budget, the minimum level required by the state. But within a few weeks of that achievement, the state went under.

“By then, we had already cut millions of dollars,” Staley said. “I said, ‘oh my gosh, what do we do now’? The districts that are weathering the storm had reserves of 5 to 10 percent.”

Staley and her staff quickly decided there was only one recourse – employees’ salaries which were now 90 percent of the district’s expense budget. In the education world, 85 percent is considered the maximum that should be spent on salaries and benefits.

In the past two years, CUSD has eliminated about 90 teaching positions, often to the chagrin of parents. Though union leaders dispute this, Combes says the district is now “tightly staffed.” Lerner Thompson, a mother of two Chico students, agrees with Combes. She says students in some Chico High classes are “packed in like sardines, especially at the beginning of the year.”

Reed says trustees tried for several years to “keep cuts away from students.”

“Sure, we could have staffed to contract,” Reed said, “but it wasn’t the best thing to do for students. We can argue about whether it was the right thing to do… it was the last thing we did and ultimately it’s how we saved the most money.”

Teachers and district officials who were interviewed for this story said that a state takeover would unfairly punish Staley and the district would lose a well-liked leader. A former teacher and school principal and the daughter of educators, she is seen as approachable, someone who has a love of the classroom and a commitment to Chico.

At the Nov. 18 board meeting, President Reed referred to a recently-completed evaluation of Staley. “…the financial crisis facing the CUSD is in no way attributable to Ms. Staley,” Reed said, reading from a prepared statement.

The future

In recent months, as Chico Unified teeters on the brink of financial disaster, the public debate at board meetings and in newspaper columns has been monopolized by disputes involving charter-school issues. But only about 1,000 students are enrolled in charter schools in the Chico area – and they are schools that seldom reflect the diversity of the district as a whole and often don’t face the same challenges as non-charters.

The traditional public school system, for example, serves most English-learner students and a growing number of special-needs students. The result is that discussions about charter schools are often marked by resentment, with opponents pointing out that charters have more funding flexibility and fewer government mandates and are benefitting from state start-up funds while traditional schools are starved for money.

Carmen Iñiguez, who oversees the statewide Campaign for Quality Education for Californians for Justice, said what’s going on in Chico isn’t unusual.

Charter schools are a “source of tension” in communities throughout the state because people often feel they “cream the crop” by admitting students who have lots of parental support and other advantages, Iñiguez said. But she pointed to a few charter schools in the state that have become exceptions to that rule, reaching out to diverse student populations and providing “an opportunity to do things differently.”

How to finance public education – education in the Jeffersonian sense that’s available to all children in some equitable way – in this post-Proposition 13 era troubles advocates like Iñiguez, district officials, teachers and parents. A recent board-commissioned survey indicated it’s unlikely that a significantly-sized parcel tax could win two-thirds voter support in Chico. California, meanwhile, is near the bottom of states in per pupil funding.

That’s what frustrates Iñiguez. “California is the eighth-largest economy in the world,” she said. “There is sufficient money. It’s problem of priorities.”

Joe Rios has often been the only Chico parent attending recent board meetings to learn about the district’s financial crisis, providing a lone and plaintive voice.

He recalls board meetings just one year ago that were packed with parents protesting cuts to sports and music, and wonders where those families are now. Schools that end up without extracurricular activities and electives, Rios said, will leave many children disenfranchised.

“I don’t think the community understands what’s at stake,” he said. “If we don’t do something for these kids, it’s going to come back and bite us. It’s really scary to think your kids might see school as jail.”

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