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Tuesday, March 18, 2008

Vanguard Investigation Part IV: Fiscal Crisis Management Assistance Team Findings

The Vanguard continues its multipart series of former DJUSD Deputy Superintendent Tahir Ahad, Total School Solutions, and fiscal mismanagement of the Davis Joint Unified Business Office during Tahir Ahad’s tenure from 1999 to 2006 as CBO of DJUSD.

The first segment of this series which ran on Sunday, February 24, 2008 examined the inherent problems involved in a conflict of interest. The conflict of interest we examined involved a series of disturbing findings of how Mr. Ahad used his position as Chief Business Officer (CBO) with the Davis Joint Unified School District as a means by which to start up his own private company for his own private gain. In short, he used public resources for private gain, a serious breach in the public trust.

The second portion of the series ran on March 3, 2008 and focused specifically upon the facilities planning and management beginning with the lost state matching funds for Montgomery Elementary, problems with Korematsu and eventually the King High debacle which led to the new school board finding out exactly what had been going on with the district’s facilities construction money. Basically money was shifted from later projects to make up for lost matching funds for Montgomery, lower than expected matching funds for Korematsu, and other cost overruns. Instead of acknowledging the depths of the problems, Mr. Ahad asked the school board in 2005 to pass a COP (Certificate of Participation), a form of debt financing, to pay for King High and some other projects. In 2006, the board learned that they only had half the money they needed to fund King High, and they realized that money had been shuffled, but only after an extensive investigation and the temporary halting of construction activities at King High.

The third segment which ran on March 10, 2008 continued to look at the facilities funding problems and other fiscal management issues. We examined the property exchange deal involving the Grande Property, which was a highly secretive and unusual process that we will argue violated a number of the California Education Code’s provisions for the sale of public surplus property. There were several primary problems with the property exchange for King High School. First, the process was conducted primarily in secret with a limited bid process. It required a property exchange to avoid possible efforts by the city to invoke the Naylor act. Finally, the process would have resulted in the district getting a low sale price for the property.

This final segment examines the report from consultant Terri Ryland and the Fiscal Crisis and Management Assistance Team (FCMAT) report. We have discussed both in previous weeks, but this time, we do so in more detail, looking at the problems with the district’s tracking and management of its facilities money and then efforts by the district—which were successful—to fix those problems.

Terri Ryland’s Report

We start this segment by returning to the problems with King High School that emerged on November 2, 2006 and resulted in the halting of construction on that project. Recall from the second segment of this series, that the school board was surprised to find out that the money that they had thought they had approved to pay for King High School in 2005 was not there. Now, the Superintendent, David Murphy, was asking for an additional $5 million in COP to fund the high school. The school board learned that they only had half of the money needed to finish the construction of King High.

As Board Member Gina Daleiden said during that meeting:
“We learned just a few minutes ago that more than fifty percent of the [king high] project is unpaid unless we make a decision about COPs. That is news to me… We need to look at the COPs that the previous board took out because I think they were for King High.”
Throughout this trying and at times contentious meeting, Superintendent Murphy was steadfast in his belief that the $10 million was still there... "I’m sure we have all the money that we think we have, but the documentation provided to the FCMAT team was deficient… I’m confident that not only do we have the money that we believe we have, but the documentation will show that.”

He explained that since we were short-staffed on the business services side, the top two positions were vacant, and that the facilities people were not people with fiscal expertise, and that this was the cause of the confusion.

It was at this point that Superintendent Murphy brought in Terri Ryland to examine the district’s books and figure out where the money that the school board believed should be there was.

As we learned two weeks ago, Superintendent Murphy was correct—the $10 million was there, it simply had been used to backfill payments for previous facilities projects and therefore unavailable to pay for King High.

As consultant Terri Ryland put it, “that wasn’t negative money, that was a shortfall in money that at one time we anticipated receiving.”

Part of the confusion on the board's part is that as Board Member Jim Provenza put it, we were “carrying the anticipated state revenue from Montgomery in our facilities plan as revenue available for projects.”

That money according to Terri Ryland was carried on the book until the end of the 2005-06 year. In other words, to the school board, it looked like money was there, that was not in fact there.

FCMAT Report

This problem among others were laid out more fully in the Fiscal Crisis and Management Assistance Team (FCMAT) report that was released on December 14, 2006.

After District Chief Budget Officer Tahir Ahad left the district in 2006, DJUSD hired an interim CBO Cathi Vogel. One of Ms. Vogel’s key recommendations to the Superintendent was to bring in the FCMAT team to examine the district and assess its conditions.

Part of the problem that came to light during the course of both the November 2, 2006 meeting and the December 7, 2006 meeting is that once Tahir Ahad left the district, there was literally no one in the district who understood the budget, where the documents were, and who could help piece together the district fiscal reports. This was a problem in and of itself.

As Board Member Provenza put it on December 7, 2006:
“We had an interim CBO, we had fiscal people here. That’s really what I’m going to. In my mind, correct me if I’m wrong, if someone leaves a district, the fiscal situation should be such that someone else could pick up the books, could look at the records and understand them and you wouldn’t have to pay someone for hundreds of hours of work to put it together. That you could have a system like that, that any CPA could go in and look at and understand.”
FCMAT not only came in to evaluate the district, but they came in to make recommendations on how to better run the fiscal office, so that these problems do not repeat themselves, so that next time someone leaves the district, it is easy for an individual to look at the books and figure out what money the district has. Instead, the district had to bring in Terri Ryland for hundreds of hours of billed work to literally reconstruct the books by hand.

One of things that encumbered the FCMAT team was the fact that “Both the prior Deputy Superintendent and the Director of Business Services cleared off their computer hard drives before departing the district.” FCMAT therefore recommended the enactment of policies and procedures for the retention of information on computer hard drives and notes, so that history can remain even when employees leave the district.

In their executive summary, FCMAT also notes that
“The organizational structure of the business division must clearly define and delineate the job responsibilities of managers, supervisors and employees… Although board policy exists, business office employees have not been evaluated annually. Some have not been evaluated for several years. A process needs to be implemented to ensure that employee performance evaluations are prepared regularly.”
While we have primarily focused this investigation on the Facilities projects and their mismanagement, there is a significant trail of mismanagement within the district offices themselves in terms of personnel. We discussed some of this briefly in the first segment. Interviews with past employees suggest that these structural designs were not accidental and not merely sloppy, but rather intentional features of the office designed to maximize control and loyalty to the former CBO, Tahir Ahad.

The FCMAT report goes on to discuss the fact that “business department staff do not currently receive cross training… Cross training helps departments perform effectively when an employee is absent, and enables employees to perform tasks outside their normal duties when necessary.” It goes on to note: “It appears that the previous CBO and director completed a lot of tasks and analyses on their own, and did not leave backup or information for future employees to follow and understand.”

This again seems to be an innocuous function of an individual’s management style, but it also leads the entire office to be dependent on a single individual in order to effectively function. That means that once that individual leaves the district, the ability to carry out previous functions virtually collapses. Indeed, FCMAT noted, “the district lacks written desk manuals, standard operating procedures or other specific reference documents in the business office.”

FCMAT then goes on to rate the district as having a “high fiscal health risk level. The areas of concern include cafeteria interfund borrowing, cafeteria encroachment, management information systems, retiree health benefits, leadership stability, district liability, and facilities.”

Most importantly—“no single report adequately tracks projects and the different types of funding used on each project for both past and current projects.” I shall talk more about this shortly.

Right now, it is very important to emphasize that all of the shortcomings that FCMAT put into place were addressed by the district in short order. In fact, by the time Montgomery came up before the State Allocations Board, the district informed the board that they had already implemented the recommendations of FCMAT. This will be discussed more at the end of this segment, but given the gravity of the current budget situation it is important to note that at the very least the district is on sound fiscal footing in terms of policies and procedures—however, this was not true in 2006 and that led to a high risk rating that was quite alarming to current school board members.

FCMAT looks at 18 categories of “Fiscal Indicators” and determined 7 categories were “not acceptable.” That put the district into the “high” risk category.

It is interesting to note that FCMAT rated the category, deficit spending, as acceptable. However, they also noted that “since FCMAT’s review, the district has given a 6.5% salary increase that will result in deficit spending of $1,030,758 in 2006-07.” This was not included in their projections and analysis and should be a note of concern that would carry-over to later budgetary issues. Unlike other fiscal practices, this one can be put on the current school board.

The first problem that FCMAT cited was interfund borrowing. On paper, FCMAT said that the district does not appear to have interfund borrowing. However, since the cafeteria fund had ended in a negative balance the previous four years,
“interfund borrowing should have occurred instead of ending the year with a negative cash balance. Because interfund borrowing is not occurring, there has been no awareness or discussion at the board level regarding the negative fund balance.”
Along the same lines, the district got a negative finding on encroachment. “The district needs to engage in interfund borrowing at year end to cover the negative fund balance, and address the issue of why this fund is continually in the red.”

Furthermore, the district was criticized because key fiscal reports were not readily available and understandable.
“The COE [County Office of Education] expressed concerns about how questions are answered on fiscal reports. The district provided backup as requested, but the COE often had additional questions or concerns based on the data provided, and felt that the reports did not answer the questions in many cases.”
The district scored poorly on retiree health benefits that were funded on a “pay-as-you-go basis” rather than having an actuarial study and a plan to fund the ongoing liability.

The district also go dinged because they had an interim CBO and therefore lacked stability in leadership.

An interesting point was made that the governing board of the district generally refrains from micromanaging.
“Comments were made that the board micromanages, but interviews and board agendas and minutes did not corroborate that. Board members have asked for additional budget information, such as budgets by department and history of past reductions versus what has been reestablished. These types of requests are common and reflect fiscal responsibility.”
The district liability was not acceptable either. The district had not done the proper legal analysis regarding potential lawsuits nor had it set up contingent liabilities for anticipated settlements and legal fees.

While some of these problems were serious, most of them appeared to be easily resolvable with good management from the administration and direction by the school board.

The most serious problem, not surprisingly for anyone who has read this series, is in the facilities area.

The biggest and most alarming finding is that “over the years, the district has transferred money between funds and it is difficult to ascertain which funds were used for which project.”

One of the biggest findings that both FCMAT and Terri Ryland pointed out is that the district used a single account for its facilities funds rather than creating a separate account for each new project. That meant that in addition to difficulty tracking the project as FCMAT pointed out, it also meant that it was easy to use monies that had been designated to pay for one project could easily be used to pay for previous projects—and the board would have difficulty tracking those payments and funds.
“The tracking reports are inadequate and appear to have been used throughout the program.”
Part of the problem was that the Chief Business Officer left in February of 2006.
“An interim CBO was hired but was told not to work on facilities accounting and funding, because the former CBO would do that. That apparently did not occur, and thus the area of facilities needs immediate attention… The previous CBO controlled all facilities planning and long-and short-term funding recommendations and decisions with no input from the Facilities Department since 2004, when the previous Facilities Director left.”
Furthermore, personnel was not the only problem the district faced on this.
“Even if adequate personnel were available to track projects, the tracking mechanisms used are inadequate and have been for the length of the program. A number of reports are used, but do not appear to reconcile with the district’s accounting system.

There also is no reporting mechanism to track past, current and future projects and their budgets in a master plan format so that the board, staff and public can readily see the expenditures of facilities funds over the duration of the program since approval of the Master Plan in 2000.”
FCMAT goes on to discuss the problems with Montgomery and Korematsu that were discussed in detail in the second segment of this report.

The problem of commingled funds may be explained away as sloppiness or even expediency on the part of the previous CBO. However, one point that needs to be made is that this is not an accidental policy but rather the result of specific board action early in Tahir Ahad’s term as CBO that allowed facilities project money to be placed in a single account rather than giving each project its own account that could be tracked over time by the board or the public.

Board President Sheila Allen found this the most alarming aspect of the FCMAT report’s findings.
“I think the most alarming thing about it was my concern about the specificity of the tracking of the dollars. If someone is in charge of tracking the money, I would hope that they would know exactly which dollars come in, into which pot, how exactly they were spent, and that is something that should be fairly easily tracked. I know it’s a very big organization and I absolutely know how complex school financing is, but that is my expectation of a finance department—is to know exactly how much comes in, how is it supposed to be spent, and how was it spent. "
A final problem that we have already discussed is the use of anticipated but not yet board approved moneys in line items as though the money were there and approved.
“In February 2004, staff prepared and presented a report detailing another revision to the Master Plan. The revisions included another $9.7 million in additional projects. In this report, no mention was made of the proposed funding sources for these projects.”
FCMAT then goes on to say:
“Because of the way the reports have been developed and presented to the board and community, it appears that all such projects have been planned. However, the funding sources are unclear because the board has not yet approved additional debt, such as COPs. Potential future revenue amounts are shown on the cash flow statements even though they have not been approved by the board, giving the impression that there is sufficient cash to proceed with the projects. The reports must be developed to distinguish between secured funding and potential funding to give the board greater certainty and understanding in their discussion of future facility projects.”
Board Vice President Gina Daleiden addressed this point when she spoke to the Vanguard in January 2008:
“There was also a problem with documents that went to the board and the public not clearly reflecting reality. When we adopted the FCMAT report, we made a motion… I made a motion seconded by Tim Taylor to direct the business staff to insure that speculative, not yet board approved financing is not reflected as available cash in cash flow documents and is instead clearly marked as possible options. The FCMAT report also says that that should happen.”
On page 95 of the FCMAT report they note $3 million was erroneously entered onto the line item of “projected redevelopment fund.”
“Since the issuance of FCMAT’s initial draft report, the district has disclosed that the $3 million was entered on the wrong line and instead should have reflected a new COP issuance, with a second $3 million to be requested in 2007. Since neither amount had been approved by the board, it is not appropriate to reflect that as cash flow unless clearly noted as potential cash. The current practice of listing the amounts without such a notation must be discontinued. The district should insure that all revenue projections are realistic and based on likely funding.”
According to Board Vice President Gina Daleiden, the board took the findings very seriously.
“Because that was such a concern when the board adopted the FCMAT report, the board made a series of motions adopting a lot of the recommendations from the from the FCMAT report that was done very deliberately so we could say we take this very seriously and make sure that our practices become best practices. Now in terms of what key changes were most vital to make, you can find that online in Bruce’s response to the FCMAT report, our new CBO. And I would cite these changes as well as… so here’s some of the changes… Some of the changes are new fiscal team has implemented, stronger financial controls, clear separation of authority within the accounting staff, and more accountability in staffing decisions. We have hired a director of facilities who will save us money by bringing professional oversight to our facilities budgets, maintenance and projects. We have instituted more regular reporting to the board on budgeting items. One of the things that it says in the FCMAT, that it notices in the past that the interim budget reports were put on consent without discussion and those are always on our regular agenda now so that the board can consciously talk about any adjustments to the budget and track how budget expenditures are meshing. [refers to PowerPoint on website that shows Colby’s changes to the FCMAT report]. I’m confident that our new CBO is implementing the FCMAT report. And it was very clear that that was one of the board’s top priorities for our interim superintendent. To make sure that the FCMAT report was being implemented.”
Board President Sheila Allen:
“To my knowledge we have either already implemented the recommendations or there are plans in place to do the recommendations. The key changes that they wanted in place were two things, is that they were talking about a coding system—that’s the standard practices. And the other thing is that you need a permanent head person and fiscal manager and we have both of those now.”
Some have defended past fiscal practices of the district on a number of fronts. The first point of course is that no money has been lost or misspent by the district.

Even strong critics of the previous regime agree on this point.

Board Vice President, Gina Daleiden:
“I do want to be clear that the money was spent on district buildings. So it wasn’t taken away or put into something that had nothing to do with the school district. They were spent on our buildings just no one realized the way in which it was being spent”
Board President Sheila Allen was very adamant that there was no lost money.
“The FCMAT report, and to my knowledge there was no lost money, there was no money that was illegally spent, but it was very difficult for someone to come in and be able to track exactly—here’s the money coming in, here’s how it was spent. And that’s concerning because these are taxpayer dollars. So we want to make sure that we know how much money we have, how it was spent, and that it was spent in the right category.

The good news about FCMAT is that it gave us some very clear guidance from professionals of where we need to go to do better. Although there was alarming information in there, the important thing to me was very help that rather than someone to say to me it’s a mess, or we don’t know exactly where the money’s been going, what was important to me is that they said here’s what you can do, you can do this… And also it was very important for me to know, and I’m sure I said this at public meetings, there’s no lost money. Nothing illegal has happened.

All of the experts, both ours and their’s were able to say, there’s no lost money, there was nothing illegal happened. That was very important to me that was very clear to me… I’ve been looking around for a better word than sloppy bookkeeping. It wasn’t very precise. So we put into place a more precise approach to bookkeeping and there’s all new people over there. So that’s the really good news is that we have people that we can trust—their numbers, we can trust that they’ll get us the information straight up…”
The Vanguard agrees with that assessment, but would argue that it is less than clear that this the end of the story. While in the true sense of the word, money was not lost, the poor fiscal practices of the district monopolized board and staff time that could have been spent better in other areas. Moreover, it is far from clear that these practices did not cost the district money both in terms of inefficiency of operation but also in terms of the time and money needed to get a straight accounting from both FCMAT and Terri Ryland. That in a very real way is lost money.

A second point was made to me that the FCMAT rating of “high risk” was misleading. The district got good marks on position control for the most part, which is the means of tracking and projecting employee salary and benefits. “A reliable position control system establishes authorized positions by site or department and ensures that staffing levels conform to district formulas and standards, thus preventing overstaffing.”

They go on to point out that a number of the deficiencies were minor and easily correctable, and that given four of those factors, that would place the district in low risk rather than high risk. On the other hand, one might wonder if some of the past practices of the district have not caught up with them in the current budget crisis.

Board Vice President Gina Daleiden was asked about the rating system.
“As with any standardized numbers, the numbers are not the whole story. So whether or not one question was weighted more than another, whether or not our score was a nine instead of a nine and a half, and I’m making that number up, the numerical value doesn’t matter to me, as much as the substance of the report. I am a trustee of this district, when I look at a document that says to me here are some issues with how the district’s finances are being run, we need to take those seriously, that’s the only way to get better. You have to look at things that can be improved and work on improving them. Some of the findings in this report—the responsible thing to do is to pay attention to them. To fix them. And it doesn’t really much matter to me whether it’s a high risk, medium risk, it’s not a grade on a paper and it’s not points in a pageant. This is about the practices of the district. And wanting to insure that they’re not only adequate but they’re really good. We have a great school district, and we need to have great fiscal practices so that we can support all of our programs and do the best for our kids. And it’s public money so we have to be careful in how we expended it.”
Both Sheila Allen and Gina Daleiden agree that things have changed.

Board Vice President Gina Daleiden wants to the public to know that “Past practices are in the past.” We have according to her new safeguards in place. We have new conflict of interest codes that will protect us from future problems with employees working in outside consulting firms, we have implemented the recommendations of the FCMAT report, the district reports to the board on a regular basis with easy to understand and clear budget updates. She expressed confidence both in the new CBO Bruce Colby and the new Superintendent James Hammond. And the board along with Bruce Colby has enacted a series of careful fiscal procedures so that it is easy to track monies as they go to and from projects.

Board President Sheila Allen likewise, declares it a “new day.”
“I really am not interested in having the district dragged through the mud further when these are things that have already happened. I’m totally fine with people knowing what happened that’s fine with me, but I want the headline and I want the last part of it to be here’s how it’s changed. It’s a new day. We have a new superintendent; we have an all-new budget office. We have this accounting information put into place. The board since I’ve been on it, has a very strong commitment to open government, no more closed door discussion about district information.”

My concluding remarks for this four-part series basically echoes the comment made by Board President Sheila Allen. I think the public can look at these problems and better understand in part why we are facing some of the budget problems that we are facing. However, I also think we must understand that the then new school board which came into office in December 2005 with newly elected members Sheila Allen, Gina Daleiden and Tim Taylor, joined with Jim Provenza in providing the leadership that has over the last two years taken deliberate and concrete steps to put the district on better fiscal ground. It was these school board members who led the fight to clean up the fiscal house of the district and in many cases uncovered past business practices condoned by previous school boards that have plagued the district for years.

There is better tracking, better oversight, and a new fiscal team. What is unfortunate is that the budgetary bottom has fallen out of the district at a time when in terms of policies and procedures, the district has never been stronger.

Nevertheless, I think there is a good amount of important information that has been gleaned out of this investigation in terms of the way that the business office was run, the way in which monies were handled, and most importantly the need for all districts to enact strong conflict of interest policies in order to better protect themselves from employees and companies that are seeking to profit on public money.

---Doug Paul Davis reporting