Part 3: OUSD and the FCMAT Report – The 8 Areas of Concern

Welcome to the third in our mini blog series on the Fiscal Crisis and Management Assistance Team’s (FCMAT) Fiscal Health Risk Analysis of OUSD, issued in August. We provided historical background, and then yesterday looked at the seven areas in which FCMAT gave OUSD a passing grade.

Today, we cover the 8 areas that FCMAT identified as areas of concern. This should shed some light on the underlying causes of yesterday’s payroll blunder as well as why we are facing a budget crisis again:

1. Deficit Spending: Although it should be obvious, this is the core of OUSD’s financial problem: OUSD spends more than it brings in, has done so for years, and does not seem to have a plan to stop deficit spending. It’s time to break this bad habit. The proposed $15 million mid-year cut, while painful, would demonstrate the start of some needed fiscal discipline.

2. Fund Balance: The District’s fund balance is the accumulation of extra funds that don’t get spent each year. The most scrutinized fund balance is in the unrestricted General Fund, which is the main operating fund, is the most flexible, and is the one with a state-required minimum. Well-managed districts have healthy fund balance – when revenues are up, they save for a rainy day. OUSD’s fund balance is now less than the state-required minimum. Also, OUSD doesn’t seem able to accurately forecast whether it can restore that fund balance. The FCMAT report narrates the events during the 2016-2017 school year, during which the projected fund balance steadily dropped as new financial information came in.

3. Reserve for Economic Uncertainty: By the end of 2016-2017, OUSD’s fund balance was less than the legally-required 2% (i.e. $11.3M). And to make matters worse, OUSD lacks a plan to restore the reserve in subsequent years. No wonder the state is concerned.

4. Bargaining Agreements: Over 90% of the District’s employees are represented by one of 7 different bargaining units. The collective bargaining agreements are negotiated every few years between the district and each unit, and dictate employee wages, hours, duties, and working conditions. FCMAT answered Yes to 5 of 7 questions in this section, indicating district compliance with the required bargaining process. However, FCMAT gave the district an overall “No,” indicating this is an area of concern, because all had received wage increases greater than the Cost-of-Living-Adjustment (10-15% over the last two years) and the district didn’t have a financial plan to sustain these compensation increases. Five of seven bargaining agreements have expired.

5. Encroachment: This is the term used when some programs are not able to cover their expenditures with their designated revenue sources and thus “encroach” on the General Fund. (The gentler term is a “contribution.”) OUSD’s programs for students with special needs has required the biggest subsidy, which is typical for most urban districts, although OUSD’s encroachment on special education is 18% higher than other districts. In addition, the Cafeteria and Child Development programs both required roughly $2 million contributions from the General Fund in 2016-2017.

6. Position Control & Human Resources: The vast majority of any school district’s expenditures are employee salaries and benefits. Therefore, good financial management includes “checks and balances” on all staffing decisions. Unfortunately, FCMAT answered “No” to 6 of 7 questions in this section. Based on FCMAT’s analysis, the district does not control unauthorized hiring, is not able to control over-staffing, and lacks the internal controls to prevent fraudulent activity. Given these findings, it’s a relief that we don’t see massive payroll errors more often.

7. Budget Monitoring & Updates: This section covers the activities that a district should do to monitor and stick to its budget. OUSD does 8 of 13 of these things but still receives an overall “No” from FCMAT. This section of the report helpfully describes each breakdown in OUSD’s financial “system” and concludes with the by-now-obvious statement “The district should address issues identified throughout this report that have a major impact on its budget.”

8. Leadership/Stability: This section receives “No” answers to all four questions. OUSD had high superintendent turnover for decades: 24 superintendents in the last 50 years. This report makes clear the financial impact of that leadership instability, scolds district and site administrators for not adhering to policies, regulations, and chides the Board for not following standards established by the California School Board Association (CSBA) for good governance.

In FCMAT’s own words:

“Based on the information in this report, the district has lost control of its spending, allowing school sites and departments to ignore and override board policies by spending beyond their budgets. In many cases, board policies are knowingly ignored and/or circumvented without consequences.”

Tomorrow we will close out this part of our #OUSDBudget series with a look at the four areas that FCMAT characterized as “mixed.”

Part 2: OUSD and the FCMAT Report – The “Good” News

Yesterday, as part of our #OUSDBudget series, we provided some background on the Fiscal Crisis and Management Assistance Team’s Fiscal Health Risk Analysis of OUSD, issued in August. Today, we delve into the seven of twenty areas where FCMAT said OUSD was not doing too bad.

According to FCMAT, OUSD earned a positive rating in three of twenty areas, based on “yes” answers to all the questions in each topic area:

  • Debt: Surprisingly, OUSD scores well on this, despite still owing the state $40 million from the last time the district was bailed out. FCMAT’s rating is based on OUSD not having lots of non-voter-approved debt, having sources of funds identified to pay off the debt it does have, and accounting for pension liabilities correctly.
  • Multiyear Projections: OUSD received a favorable response on all five questions in this category, which are focused on the process for creating multi-year projections. Unfortunately, FCMAT didn’t ask about the historical variances between OUSD’s projections and their actual expenditures.
  • Charter Schools: FCMAT reports that OUSD’s Charter Schools Office is doing its job well, monitoring the financial condition of each charter school authorized by OUSD. (In Oakland, all the charters – and their budgets – are under the oversight of OUSD but independently managed by not-for-profit 501c3 governing boards, which is why charter budgets are not affected by OUSD’s cuts.)

In four areas, OUSD passed overall even though it failed on some specific questions in that category and some of FCMAT’s answers left us scratching our heads.

  • Management Information Systems: Overall, the District passed this category based on “Yes” answers to four of seven questions – although we disagree with the “Yes” answers to the questions “Are the district’s financial data accurate and timely?” and “Are key fiscal reports accessible, timely, and understandable?” If these were actually true, we shouldn’t be in the situation we’re in.
  • Budget Development & Adoption: Similarly, OUSD scored an overall positive in this category based on “Yes” answers to 8 of 10 questions – but some of those answers were contradicted in another part of the report. For example, FCMAT notes that the biggest dollar problem in the 16-17 budget was “the result of over-projecting ADA“ but then answers “Yes” to the question “Are projections for ADA, enrollment, revenue, and unduplicated pupil count accurate and reasonable?” Similarly, the report it points out that the District does not have a functional position control system for hiring, even while answering “Yes” to the question “Does the district use position control data for budget development?”
  • Internal Controls & Annual Independent Audit Report: FCMAT gives OUSD an overall Yes on this section despite concluding that the district does not implement appropriate measures to discourage and detect fraud, has not received an audit without a material finding, and “many employees report a lack of consistency and continuity with district policy and procedures,” such as “spending beyond site/department budgets.”
  • Facilities: Overall FCMAT rates the district positively on this topic, based on 8 of 10 “Yes” answers, despite noting they weren’t provided with the legally required audits of the bond measures and that the district “may be out of compliance in this area.”

So, that’s the “good” news – the seven areas in which FCMAT gave OUSD’s fiscal health a passing grade. Yet even in these areas, however, there is clearly a lot of work still to be done. We’ll be looking for the proposed Action Plan to include strengthening financial information systems and reporting, increasing accuracy in budget development and ensuring employees stick to established policies and procedures. Tomorrow, we will review the eight sections that raised concern.

OUSD and FCMAT: Preparing for the Dec. 13 Report

Next Wednesday, on December 13, OUSD’s Board is expected to vote on extremely painful midyear budget cuts. In the midst of that pain, and in response to a recent report by the state’s Fiscal Crisis and Management Assistance Team (FCMAT), the staff is supposed to present an “action plan'” to strengthen the district’s fiscal management.

If we ever want to end the cycle of budget crises, this FCMAT action plan and, more importantly, its actual implementation, are critical. 

Continuing our #OUSDBudget series, we’ll be posting a few blogs this week on FCMAT’s findings on OUSD’s fiscal management to provide context, share a glimmer of good news, lay out the bad news, and consider implications for the future of Oakland public education. Each one will be a relatively 1-2 page quick read versus the 40-page report.

Our goal with this is for the educational leadership of Oakland across all sectors to share a common understanding of the problems so that we can be the generation that breaks the decades-long cycle of budget crises.

Who or what is FCMAT?

The Fiscal Crisis & Management Assistance Team (FCMAT, pronounced “Fick-Matt”) is a non-profit organization created by state law (AB 1200) in 1991 to help local education agencies manage their finances.

OUSD and FCMAT have had a decades-long, on-again, off-again relationship. FCMAT first looked at OUSD’s finances in 1999. During State Receivership in 2003-2008, they were brought in regularly; this 350 page report from 2007 reveals just how deep some of OUSD’s fiscal problems go. In a subsequent 2008 report, as part of its analysis to justify returning the district fully to local control, FCMAT gave OUSD as score of on 6.23 out of 10 rating on Fiscal Management – a solid D-minus (but it was a huge increase from up from 0.73 in 2003!).

The Most Recent FCMAT Report

The OUSD Board requested FCMAT’s help again earlier this year in April 2017 (coincidentally, the same month back in 1999 – 18 years ago – when the Board first voted to request FCMAT support). At the August 23 OUSD Board meeting, FCMAT presented its “Fiscal Health Risk Analysis.”

The report analyzes 20 factors based on answers to 117 specific questions. A “No” answer to a question basically indicates a weak financial management practice. FCMAT’s rule of thumb is that an overall “No” in more than seven areas is “cause for concern,” requiring “some level of fiscal intervention.”

OUSD failed in eight areas (out of 20). It also passed seven and had mixed reviews on four. (One was not applicable.)

In response, at the Sept. 6 meeting of the newly reinstated Budget & Finance Committee, Directors Eng, Gonzales, and Torres passed a resolution calling for a plan of action in response to the FCMAT report by the second meeting in October. On October 25, staff asked for an extension, which the Board agreed to.

The Action Plan Coming December 13

The Action Plan is now scheduled to be presented at the December 13 Board meeting. Over the next few posts, we will share our thoughts on the FCMAT report and Action Plan. What are yours?

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