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Thursday, July 24, 2008

Vanguard Report: Genesis of DJUSD's Fiscal Problems

The Vanguard has recently received a public memo from former Davis Joint Unified Superintendent David Murphy to the Board of Education dated September 20, 2006. The memo was a response to questions, requests, and comments pertaining to a proposed teacher salary hike of 6.5% and a concurrent proposed administrative salary hike.

In this memo are factually incorrect statements that ultimately led the school board to approve a 6.5% teacher pay hike based on claims in it that the district had the funding available over a three-year period to pay for this pay increase. At the time this was a factually incorrect assessment. According to sources however, it is likely that neither the Superintendent nor the interim CBO were aware of this fact.

At the outset, it is important to realize that this assessment should not be construed as an attack on teachers, the Davis Teachers' Association, or their worthiness to receive a pay increase. On the contrary, the Vanguard believes that in general, teachers are well underpaid for the services they render to a community and to society as a whole. Rather, this points to specific problems in DJUSD at the time, that led to the need for changes to be made both in terms of fiscal accounting practices and personnel.

Finally, it should be pointed out that the problems that led to this incorrect assessment have been taken care of. The District's commissioning of FCMAT as discussed in our investigative series on the district's former Chief Budget Officer revealed key flaws in the district accounting practices--flaws that have now been corrected by current CBO Bruce Colby and new Superintendent James Hammond. In other words, these problems will not repeat themselves in the future, however, they do have a lasting impact the district's current budget situation.

According to Bruce Colby, this pay increase cost the district roughly $2 million in salary increases. Looking at that within the context of the original and now current budget shortfalls, one quickly realizes the magnitude of such a situation.

The Memo

Beginning on page 2 of the memo the former Superintendent writes:
"Our budget experts, Cathi Vogel [Ms. Vogel was the interim CBO who was hired to temporarily fill Mr. Tahir Ahad's position and occupied the position until the hire of Bruce Colby in 2007] and Maureen Fitzerald, both of whom are fiscally conservative in a responsible way, have said that the three-year projections of ongoing expenditures have ongoing revenues. Maureen has assured me of this. Thus, the funds are there to support whatever the board wants to do--to fund the 6.5% for all employees or to use some or all of those funds for other purposes. Thus, a fiscally conservative superintendent would say that the funds are there for board decision-making, according to board priorities about what is in the best interests of the district, all things considered."
He continues:
"Given that the funding is available, given the other considerations of funds for the district programs, and given the effect on ALT members of board choices, I do think and would recommend that the board fund the 6.5% improvement to the ALT salary schedules as the next priority item to fund. In fact, I do think that would be in the best interests of the district and board priorities, all things considered."
A board member then asked:
"Since I have been on the board, the unappropriated amount of the ending fund balance has always been considered "one time money." How can we justify this change?"
The Superintendent responds in his memo:
"The fiscal solvency of the district's budget is detailed in the three year projected budgets, based on a 6.5% increase to all employee salary schedules [this included administrative pay raises at 6.5% in addition to teacher pay raises]... Maureen assures us that the ongoing expenditures of 6.5% increases to employee compensation packages have ongoing revenues to support those expenditures."
Inaccurate Information Provided to the Board

The board was told that they would have to use one-time reserves the first year of this pay increase in order to cover the expenditures. After that, monies would become available on an on-going basis to pay for the salary increase. The board was told that this increase would thus only require a one-time use of one-time money. As it turned out, this was not accurate either.

The three-year ongoing fund projection was wrong. There were at least two glaring errors in it.

First, the budget was missing some positions that were being paid $400,000. FCMAT discovered this in their report to the school district.

Second, there were changes to special education funding that were not factored in and this accounted for nearly half a million dollars in expenditures. Both of these errors accounted for $900,000 or just under half of the money spent in the salary increase.

The district would keep itself fiscally solvent and the budget on the positive side by spending the district's voluntary (as opposed to the state mandated) reserves. As those reserves have become depleted however, the district has run into huge fiscal problems. [On a side note, districts such as Woodland right now are using their reserves in order to remain fiscally solvent and they will likely run into similar budget problems in the next few years if this economic downturn continues].

What is the root of these problems? According to a board member at that time, the problem largely consisted of problematic budget tracking procedures that were in enacted under Tahir Ahad.

Again please see our four-part series on the former CBO for a more detailed explanation.

Basically the money in the district was poorly tracked. It was difficult to distinguish on-going funds from one-time money. Carry-over money and other one-time money was rolled into the general fund masking the differences between funds and funding sources.

It is the best guess that the Superintendent probably did not know at the time he was providing the board with incorrect information.

During this time, the role of keeping track of the money had fallen to interim CBO Cathi Vogel. Ms. Vogel repeatedly told the board that it was difficult and murky to figure out what was going on in the books. As the FCMAT report makes clear, the former CBO had left the district with the books in a complete mess. In addition to FCMAT and the work of an independent auditor, it would take present CBO Bruce Colby nearly a year to figure out the district's fiscal situation. These problems are now corrected and this type of problem will not happen in the future.

Nevertheless, the damage was largely done. The district has to heavily rely on their professional staff to make assessments about the viability of new spending programs. There is little doubt that the district is inclined to give teachers salary hikes when the money is available. However, they need to be able to make fiscally sound decisions based on the advice given by professional staff. They need to be able to make informed decisions.

During this incident they received incorrect information based on sloppy accounting practices of past employees and poor decision making by present employees. As a result, the district has dismissed employees who were not providing them with good advice, and put into those positions, individuals who they trust to accurately tell them the truth of their fiscal situation.

One cannot stress enough the importance of the FCMAT report or the changes that the district enacted as a result of that report.

Again, for further information please take a look at the Vanguard's reporting on FCMAT and the problems with the previous accounting system and subsequent changes to the system that have made the district far more sound in its fiscal decision-making.

---Doug Paul Davis reporting