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.”