Upland Unified School District On Brink Of Financial Meltdown

(May 10) Auditors are going over the Upland Unified School District’s financial records with a fine tooth comb after having been alerted by the San Bernardino County Superintendent of Schools to a series of financial irregularities.
An examination of the books has already demonstrated, reliable sources tell the Sentinel, misfeasance on the part of current or former district personnel. Auditors are now zeroing in on several specific matters that could constitute malfeasance, the Sentinel has learned.
The district’s financial circumstance, which has been eroding for three years, grew perilous last year in the aftermath of what has been described as a “laissez faire” approach to management that presumed upon future availability of and increases in revenue that never materialized or was committed elsewhere.
Those problems have manifested in the district being faced with a projected $9 million deficit in the upcoming 2013-14 fiscal year budget. Accordingly, the district must make immediate and substantial cutbacks to its upcoming budget or otherwise become insolvent, triggering a series of measures, including a state takeover. Such a takeover would result in rendering the board of trustees powerless, the loss of the superintendent, reduction of educational services to a minimum to ensure operational costs do not exceed revenue and the imposition of a management regime involving administrative caretakers functioning out of Sacramento.
An initial assessment of what went wrong at the district points to the action or non-action of three former district employees – former superintendent Gary Rutherford, who left the district in early January to assume the superintendent’s position with the Desert Sands Unified School District in Indio,  La Quinta,  Palm Desert, Indian Wells,  Bermuda Dunes and  Rancho Mirage; former assistant superintendent Linda Kaminsky, who left Upland Unified to become the superintendent of Azusa Unified School District at the end of the 2011-12 school year; and former assistant superintendent of business services Deo Persaud, who was recently dismissed from his position.
Multiple sources, including those at the local, county and state level, say that the district’s top management team under Rutherford failed to disclose and in fact obscured the district’s deteriorating financial situation from the school board, while committing and double committing future district revenue to debt service in a gambit that has left the district ill-positioned to pay for operations, including teacher and non-teacher payroll, in the upcoming fiscal year.
At the root of the problem is the state of California’s practice in recent years of utilizing so-called deferrals to overcome the state’s structural deficit. Essentially, the state, to avoid wholesale educational program cuts, has deferred, i.e., delayed, for up to one year making payments to school districts. Instead, deferrals – essentially IOUs – are issued to the districts. For the last three years, the state has issued $7.4 billion in deferrals to public schools throughout the state.
This has resulted in districts forming groups, known as pools, that band together and use their collective deferrals as security and/or collateral to obtain bond financing or loans which are then used to fund current district operations. The districts are held responsible for the financing costs. This financing methodology – known as TRANs for tax revenue anticipation notes – has become routine among school districts statewide and involves governmental entities beyond the schools themselves. In San Bernardino County, the county treasurer/tax collector is involved in the TRANs arrangements. Also in San Bernardino County, as in all counties, the county superintendent of schools oversees the financial operations of all districts, and is provided with a tentative outline of each district’s budgetary projections for three years into the future and a more in depth projection for each upcoming year’s budget. The county superintendent’s office evaluates those submissions and provides the districts with feedback about the practicality, reliability and workability of those proposed operating budgets and how realistic the district’s projected expectations of revenue and expenditures are, together with advisals about the need to curtail expenditures, reduce or eliminate programs or enter into contract negotiations to maintain fiscal integrity or take other corrective financial action as is appropriate. The county superintendent also rates districts on a three level scale, designating those districts that have revenue that exceeds their operational costs and can maintain reserves as “positive,” those that essentially break even with regard to their revenues and expenditures as “qualified” and those that take in less money than they spend as “negative.”
According to information available through the San Bernardino County Superintendent of Schools, there were numerous “red flags” over the last several years indicating Upland Unified was on a collision course with fiscal reality.
Two and three years ago, Rutherford and his team, in submitting their budget projections, had sought to have the district rated as “positive.”  Those upbeat ratings were initially forthcoming but belied a downward trend in the district’s financial state that began gradually and accelerated. In his first submission for the county’s financial evaluation this fiscal year, Rutherford asked for a positive rating, only to have it reduced to qualified. His application for the second interim rating in 2012-13 sought a qualified rating, which was ultimately downgraded to a negative rating.
“In fiscal year 2010-11 both the first and second interim financial rating for Upland Unified were positive,” Christine McGrew, the chief communications officer for the county superintendent of schools told the Sentinel. “In 2011-12, the first interim report was positive and the second was qualified. This year, 2012-13, their first interim report was qualified and the second interim report was negative, all based on San Bernardino County Schools’ rating system.”
While the county superintendent of schools office informs each school district office of its ratings, a mix-up or diversion of that notification after it reached the Upland Unified School District office resulted in delays by which Upland Unified’s trustees remained in the dark as to the qualified ratings in previous years or the negative rating this year until very late in the process. It has only been within the last two months, while working with interim superintendent Sherri Black in preparing for the upcoming 2013-14 budget, that the school board members learned of the district’s dire financial condition.
Those close to the matter suggested Rutherford and his team had originally gotten behind the eight ball through no direct fault of his or their own but rather as a consequence of the state’s action in instituting the funding delays. But over time Rutherford contributed to and compounded the problem, it was suggested, when he shied away from hardnosed bargaining with the district’s unions, mistakenly assuming that the district could continue to pay what have been characterized as generous salaries and benefits to district employees because the state would in time increase educational funding. He hung on to that delusion, believing that Proposition 30, the school funding initiative that was narrowly passed by voters in November, would increase school funding. In reality, that measure served only to maintain school funding levels.
Auditors have come across clear indications that the district did not use TRANs money on what had been projected to be its use in the various budgets that were submitted.
“The district was trying to leverage the deferrals and committed the money to things other than paying off the TRANs debt,” one knowledgeable official told the Sentinel. “They were borrowing on borrowed money and now it has snowballed on the district. The Tax Revenue Anticipation Notes that were secured by the deferrals were used for things other than what was authorized. If and when the deferred money is finally paid by the state, it is supposed to get impounded by the county treasurer. What they [Upland Unified] did is they did not use it to pay off their operational obligations like everyone else. They borrowed money using the deferrals as collateral and didn’t pay off those loans.”
Payments are now coming, or are past, due, and money that should be used to run the district next year is being eaten up to cover debt service on past loans to the district.
In an exclusive interview with the Sentinel, Rutherford said, “I don’t believe it is accurate to say we were double bonding. We absolutely did have a funding shortage.  We were utilizing TRANs money, which is a typical strategy used by many school districts to deal with the state having deferred over 40 percent of the schools’ budgets into the next fiscal year. TRANs are a swing loan, if you will, like equity credit on your home where the notes are issued, the money used and then immediately paid off when the deferred tax revenue comes into the district. It is not the preferred way of running a district but this is something you have to do when the state is not coming through with funds due to our schools. There was nothing in the way that we did this that was not above board. We worked with the county and the TRANs arrangements were fully audited and vetted. I am not aware of any double bonding. I am not even sure what that means.”
While Rutherford acknowledged that during his final months in Upland he anticipated a deficit in the upcoming fiscal 2013-14 year, he said it was nowhere near the $9 million figure the district is now struggling with.
“When I left, the number was about half that,” he said. “$9 million seems high.”
Rutherford disputed the report of the district having received a negative financial rating from the county superintendent of schools office. He said that the district had achieved a status of “self-qualified,” meaning that “The district was able to pay for all of this year’s operating costs. We were qualified this year. I don’t know about the next two years, but by our own actions we were self- qualified in the current fiscal year.”
County auditor/treasurer/tax collector Larry Walker expressed concern over Upland Unified’s double borrowing against the TRANs but was prevented from initiating any action at that point by the state, which has granted school districts wide latitude in how they structure their financing of the stopgap measures they use in employing the deferrals.
“We became aware of how the district was using its TRANs money and expressed concern that the money they were borrowing was being used not for the purpose of addressing their cash flow problems but for budgetary purposes,” Walker said. “We were concerned at the time about where that would leave them. With the perspective we have now, I think it is pretty clear that the district had some monumental multi-year problems and its use of the TRANs money it was borrowing that we were concerned about was just a symptom of what was going on. At this point, I could not say what would be worse for Upland Unified officials: having to make the absolutely draconian and horribly painful cuts the district will have to make to stay solvent or see the district taken over and run by a state advisory panel.”
It is only now, after the district is on the verge of becoming insolvent, that the state has swung into action, and the ongoing audit of Upland Unified’s  books is being made in anticipation of a potential takeover of the district.
To top it off, auditors have interested themselves in what appears to be “skimming” from bond sales.  Attempts to reach Persaud, who was in charge of the district’s financial arrangements over the last three years but who was apparently let go by the district, were unsuccessful.
The catastrophe in Upland Unified is impacting more than the district itself. It is having a deleterious impact on the other districts in the county that were in TRANs collectives, such as Fontana Unified and Rim of the World School District.
“This is a wake up call to all school boards and unions that we cannot keep kicking our financial cans down the street because, like at Upland, the block wall is just ahead and Upland has hit the block wall,” said Scott Markovich, a board member with the Rim of the World School District. “At the county level, both at [county superintendent of schools]Gary Thomas’s office and every school board, we have to get our fiscal houses in order and take very seriously any negative ratings and work on getting budgets balanced because the state is not going to pull any rabbits out of the hat.”
According to audit numbers that are available, Upland Unified is running a $7.9 million deficit in the current fiscal year. It is not clear how much of that deficit has been offset by the use of reserve funds.  The district was unable this year and will be unable next year to reach its goal of salting away three percent of its incoming revenue into its reserve accounts. The $9 million deficit next year will come about if the district continues to operate at all of its current levels.
Sherri Black, who has served as the interim district superintendent since Rutherford’s departure, told the Sentinel that “We have been making cuts and they are ongoing, but they have not been deep enough.”
She said the county superintendent of schools was monitoring the district closely, given its precarious financial condition. She contradicted Rutherford’s assertion that the district had a qualified rating. “The county changed our status from qualified to negative,” she said.
Black said Rutherford had accurately characterized the district’s reckoning of its finances at the time of his departure. “In December and January, it appeared our deficit was going t be between four and five million [dollars],” she said.
She said that a major problem bedeviling the district is the unpredictability of funding coming from the state and she intimated that this lack of clarity was in some measure responsible for the circumstance the district is now in.
“It is very difficult when we don’t have reliable projections,” she said. “We do not know what kind of funding will come down to schools in fiscal 2013-14. The county will not let us proceed with the projections we have, which may be inaccurate.”
The district is challenged by its high payroll, Black said. “Ninety-one percent of our budget is personnel related,” she said. “We are paying a very high percentage in salaries.”
Reports of bond skimming pertaining to the district, Black said, “are not true. Anyone saying that does not have accurate information.” She said intimations or rumors that Persaud was implicated in any sort of financial wrongdoing and had been terminated as a result were false. “He took a leave of absence for personal reasons and at this point he will not be coming back. He will no longer be with the district. That is totally unrelated to the district’s financial state. There is no fiscal malfeasance or embezzlement. That report is absolutely untrue.”
To map its way out of the debacle, the district, which has recently hired Redondo Beach Unified School District human resources director Dr. Nancy Kelly to serve as superintendent beginning July 1 but is now led by  Black, is looking at a serious round of belt tightening to stave off insolvency and a state takeover. Those include teacher and other employee layoffs, coupled with pay reductions of between $8,000 to $12,000 per year for teachers. Also contemplated is the reduction of school days to the 177 state minimum. One proposal being floated is that the district return to one limited to kindergarten through eighth grade and that Upland High School, Hillside High School and the adult school will return to being under the jurisdiction of the Chaffey Union High School District.

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