LAO says state’s fiscal safety net for schools still intact

After relaxing some of the financial oversight of schools during the state's fiscal crisis, lawmakers were warned Monday to avoid making any further changes that could hamper identification of school districts headed for trouble.

The non-partisan Legislative Analyst issued the recommendation after a year-long review of the state's K-12 fiscal safety net and intervention policies.

The report comes forward in the wake of another year where a near-record number of districts have been identified as at risk of insolvency - a total of 127 - after four years of deep funding cuts and payment deferrals.

The LAO's warning also comes as Gov. Jerry Brown and legislative leaders begin negotiations over next year's budget, in which the governor wants to provide more flexibility to local districts on spending decisions.

That said, the LAO also pointed out the existing fiscal oversight system appears to be working - the number of districts requiring emergency state loans has remained minimal even during the recession.

We've identified a system that we think is effective, and works," said the LAO's Edgar Cabral, lead author.

The report provides an overview of the state's system for monitoring solvency of its school districts, and offering assistance, when needed, to ensure schools meet their financial obligations and continue educating students.

Established in 1991, the system makes County Offices of Education responsible for fiscal oversight of all school districts located in their county, and requires them to review a district's financial condition at various points throughout the year.

In recent years, the system has received renewed interest as the economic downturn has presented school districts with significant fiscal challenges. If a school district appears to be in financial stress, COE's - and in some instances, the state - are granted various tools to help return it to fiscal health.

But in 2009, with the economic recession in full swing and budgets being severely scaled back, the Legislature made a series of temporary moves to help districts weather the storm - and inadvertently reduced the ability of COEs "to identify fiscal problems looming on the horizon for districts," states the report.

First the state reduced the minimum reserve fund requirement for school districts to one-third of their existing levels in 2009-10, 1010-11 and 2011-12, making it more difficult for COEs to raise concerns with districts carrying low reserve levels.

Most notably, the report reads, in the 2011-12 budget, the state adopted legislation that prevented COEs from disapproving 2011-12 budgets if districts appeared unable to meet their financial obligations for the following two fiscal years.

The 2011-12 Budget Act also required school districts to assume the same level of per-pupil funding in 2011-12 as they received in 2010-11, essentially requiring COEs to ignore proposed trigger reductions when reviewing school district budgets, according to the report.

Despite these temporary changes, the LAO touts the system as being effective based on the fact it has reduced the number of school districts requiring state assistance, and has provided oversight and support while still primarily maintaining local authority.

"During the more than 20 years the new system has been in effect eight districts have received emergency state loans," reads the report. "By comparison, 26 districts required such loans in the 12 years prior to the new system."

An emergency state loan is usually a district's last resort when it is unable to meet its financial obligations. Prior to this action, COEs may intervene to help a struggling district by assigning a fiscal expert to review the budget as well as any new collective bargaining agreements - often one of the main influences, along with declining enrollments, on a district's fiscal health.

More intense interventions include the COE staying and rescinding actions of a district's governing board.

When a district must take an emergency loan, it is responsible for paying - typically over a 20-year period - the debt service and other costs of the loan, as well as the salaries of various employees hired to provide administrative assistance to the district.

But, while the number of districts with troubled budget certifications has increased in tight budget times, the report notes the number of schools requesting emergency loans has not.

"This suggests the system's structure of support and intervention is serving a critical early warning function," states the report, "allowing districts to get the help they need while fiscal problems tend to be smaller and more manageable."

To review the report in its entirety, visit more