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How Vallejo school district got itself $60 million in red

Carrie Sturrock, San Francisco Chronicle, June 28, 2004

Oakland Unified Requests $11 Million More
Follow Up Audit in Vallejo Could Lead to Criminal Charges

School District Loans Outstanding as of June, 2005

Oakland Review from FCMAT shows Improvement, September, 2006

Bill Introduced to Return Some Local Control to Oakland School Board, December, 2006

Some Local Control Returned to Oakland School Board, July, 2007

Oakland 2008 Multi Year Fiscal Overview

Oakland 2009 Budget Cuts Proposal January, 2009

Oakland 2009 Fiscal Review of Accounting Balances to Uncover Missing $15 Million

Oakland 2009 Adopts 2009/10 Budget
after Regaining Local Control
Oakland's New Superintendent Tony Smith's Priorities
Oakland Budget Review for Upcoming Budget Reductions in 2010/2011

Oakland Timeline for Budget Reductions for 2010/2011
Oakland Asset Management Study Nov 2009

Oakland Budget Priorities Presentation Nov 2009

Oakland Staff Presentation on School Closure Candidates Sept 2011

Vallejo school district officials grossly overestimated enrollment figures, underestimated salary expenses and approved union contracts they couldn't afford, driving the district into a fiscal collapse that required the governor last week to sign a $60 million bailout, the second largest in state history.

As Vallejo City Unified School District starts digging itself out of the hole, state and local education officials are examining what the district did wrong, so the lessons might prevent other districts experiencing financial troubles from following the same path.

Gov. Arnold Schwarzenegger approved a bill last week that provides more oversight of districts' finances before they run into trouble and provides earlier warning when districts are in distress. And state Superintendent of Public Instruction Jack O'Connell said he favors teaching school boards and districts how to hire superintendents and chief financial officers with strong fiscal sense.

Still, state and local education officials and academics say more needs to be done to prevent other districts from collapsing.

Vallejo City Unified shares several traits with many of the six other school districts the state has taken over since 1991: it is an urban district with a large number of low-income students and pupils for whom English is a second language.

Education experts also note that falling levels of state funding have contributed to those districts' fiscal crises, as have expensive collective bargaining agreements.

"We don't have any early warning system in Sacramento that says 'The complexion and the learning needs of kids are rapidly changing in places like Vallejo' and that may cost money," said Bruce Fuller, a UC Berkeley professor of education and public policy and co-director of Policy Analysis for California Education.

"The other lesson for Sacramento and the districts is 'Don't give away the store' in terms of wage increases and benefit increases and pray they can be paid for five years later," he said.

As a state administrator, Richard Damelio, takes control of the district, state Controller Steve Westly is auditing the district's finances, as required by law after a takeover. The Florida firm MGT of America, at the request of the Solano County Office of Education, is conducting a fraud audit of the district -- just as it did at the Oakland Unified School District when it received a record $100 million bailout last year.

Vallejo had been financially troubled for years when, in 2001, the school board named Gladys Phillips-Evans superintendent. She hired Frank Remkiewicz to manage the district's finances as chief business officer.

Remkiewicz had just left the Hayward Unified School District, where he was assistant superintendent of business services, and Vallejo school board trustee Rozzana Verder-Aliga said she questioned Phillips-Evans decision to hire Remkiewicz because she had reservations about his qualifications.

Under Remkiewicz and Phillips-Evans, the district developed a plan to erase a $1.3 million deficit that occurred after nearly a decade of mounting fiscal troubles. But two years later, in June 2003, business consultant Sarah Hart was hired to review the finances of another Solano County school district, Benicia Unified, and found irregularities in Vallejo's books.

For one thing, "they were a declining enrollment district and they showed a lot of enrollment growth," said Hart, who agreed to serve as the County Office of Education's interim assistant superintendent to help untangle the financial mess.

In the summary of the 2003-04 budget, for instance, district officials told the school board Vallejo would grow by 200 to 250 students during the coming academic year, but the line-item budget listed growth at 1,757 students. Because state funding is tied to enrollment, it appeared as if this new growth would bring the district an additional $8 million in revenue. But enrollment actually declined, as it had in the previous three years, by 350 to 500 students, a loss of at least $1.6 million.

Hart found other problems, so Remkiewicz revised the budget -- compensating for the inflated enrollment by underestimating the expenses for teachers' salaries, Hart said. A cursory glance made it appear the district had cut the salary rolls by $7 million, but corresponding categories like unemployment insurance and workers' compensation did not decline.Other problems included:

-- The district budgeted $327,000 in money owed by the state for mandated costs such as paying employees for their time in collective bargaining talks. But the state, mired in its own fiscal crisis, hadn't been paying up, so Vallejo never saw the money. The year before, for example, California gave Vallejo just $191 out of a budgeted $800,000 in mandated costs, so there was no way the district would receive the $327,000 it was owed, Hart said.

"We told them they could not budget like that," she said.

-- Remkiewicz also simply reversed a $1 million adjustment to workers compensation by the district's auditors to get Vallejo out of a $500,000 hole, Hart said.

As county education officials argued with the district over the budget, school board members say they were kept largely in the dark. Remkiewicz, hired to lift the district out of the red, assured them that all was fine, said board president Verder-Aliga.

County education officials sent the board, through the district office, a letter Oct. 8 detailing the fiscal problems and announcing that the county had hired School Services of California as a fiscal adviser. But Superintendent Phillips-Evans ordered her staff not to forward the letter to the board, said district Deputy Superintendent Cliff Solari, who is retiring.

In the end, the board didn't learn how truly dire the situation was until December.

"The whole board was in shock," Verder-Aliga said. "It was unbelievable."

Efforts to reach Remkiewicz and Phillips-Evans were unsuccessful. Remkiewicz resigned in January and Phillips-Evans was suspended with pay in March. Vallejo faces a $40 million deficit next year if it doesn't make immediate changes.

Other factors compounded Vallejo's problems.

This year, the state cut for the first time the base amount it pays each district per student by 1.2 percent. And Vallejo, like Oakland, is struggling with declining enrollment, which means it's getting less money from the state.

"You get into this depressing spiral ... because as you lose kids, then Sacramento sends you even less money the next year," said Fuller, the UC Berkeley education expert.

Four Bay Area districts have received bailouts since 1991 -- Vallejo, Oakland, Emeryville and Richmond, which is now called West Contra Costa Unified. Three others -- Hayward, Berkeley Unified and Livermore Valley Joint Unified -- are high on a state watch of 45 districts that may not, or cannot, meet their financial obligations.

Many of those districts have student bodies with large numbers of low- income students, or students for whom English is a second language and therefore require additional, and often expensive, instruction.

"If we fund them on a per pupil allocation, it assumes ... it's just as easy to educate a Spanish-speaking kid in Vallejo as it is to educate a wealthy kid from Orinda," Fuller said.

Experts also say many districts in financial distress are bound by exorbitant labor contracts.

The Vallejo school board approved a contract last year that may provide a 3 percent pay increase in July. Oakland was hurt by a 24 percent boost in teacher salaries. The West Contra Costa Unified School District, which has cut deeply to close a $16.5 million deficit, pays lifetime health benefits for its retirees.

The bailout reform bill signed by the governor will give county offices of education 10 days instead of six to review collective bargaining agreements.

"The employees' bargaining units in the Bay Area are much more aggressive than you find in other parts of the state," said Ken Hall, chairman of the board of School Services of California in Sacramento, which has been working with Vallejo.

But others say the problem isn't state funding or students with special needs, but school boards that lack the courage to make tough spending decisions.

"To me what you have is school boards that have been unwilling to make the cut and face down their constituents," said Stanford University Professor Michael Kirst, co-director of Policy Analysis for California Education. "They can say 'We didn't make the cuts, the state did.' "


Oakland schools to borrow another $11 million from state

Cash for reserve fund will add thousands to interest payments

By Alex Katz, Oakland Tribune, March 11, 2005

Oakland's deeply in-debt public schools are set to borrow an additional $11 million from the state, bringing the district's total debt to Sacramento to $76 million, State Administrator Randolph Ward announced this week. City schools have been millions of dollars in debt since 2003, when the state bailed out the near-bankrupt school district following years of unchecked overspending.

Officials say the district needs $11 million more to create a reserve fund, the kind all California districts are required to keep in case of financial emergencies.

"This was nothing more than moving money from one reserve over to another reserve, which is something the state and the county have recommended we do," district Chief of Staff Woodrow Carter said Thursday.

The latest loan means the district will pay tens of thousands of dollars more in interest every year.

"It continues to be frustrating that the school district and school board were taken over for running up a deficit, and the state administrator can do it intentionally with impunity," said school board member Dan Siegel, a frequent critic of Ward.

In June 2003, the state gave the district a $100 million line of credit, fired former Superintendent Dennis Chaconas and appointed Ward to run the school system. The school board was stripped of its authority.

Ward previously borrowed $65 million from the line of credit to keep the district afloat.

Officials have estimated it will cost Oakland schools between $4 million and $5 million a year for the next 20 years to pay off the loan.

The district pays about 1.4 percent interest on the debt, officials have said.

The state's criteria for returning control of the Oakland schools to the local school board have little to do with the amount of the district's debt, so increasing the size of the loan is not expected to prolong the state takeover.

Ward was en route to Southern California on Thursday and could not be reached for comment.

Auditors slam Vallejo schools for doctoring budget, duping board

Prosecutors are considering criminal charges

Demian Bulwa, San Francisco Chronicle, March 30, 2005

Prosecutors are reviewing a scathing audit of the Vallejo City Unified School District that says the former superintendent and her finance chief crudely falsified budgets and duped board members to hide the district's spiral toward California's second-largest school bailout.

The audit released Tuesday by MGT of America, a Sacramento firm hired by Solano County school officials after last June's $60 million state takeover, states that the district projected a 10 percent enrollment boost in 2003 -- worth $8 million in state funding -- even though it had been losing students.

That same year, the district projected a decrease in salaries of $4.4 million without explanation in an apparent attempt to balance the budget. The audit also found that the district superintendent withheld from the school board a letter from county officials objecting to the 2003-04 budget.

Making matters worse, the MGT auditors found that the bankrupt district may have to pay the state $433,000 for employing five teachers who lacked credentials -- including the superintendent's daughter, who had a close friend and protector in the district's chief of human resources.

"They committed a crime against the kids of the community," school board member Rozzana Verder-Aliga said after a press briefing announcing the audit's findings. She said the alleged malfeasance cost the district a chance to correct its financial woes before it was too late, but auditors said Vallejo might still have gone bankrupt.

The state took control of the district last June in the second costliest school bailout in California history. Oakland's $100 million takeover in June 2003 was the largest, and also led to an audit by MGT.

Audits have been routine after the state's seven school takeovers. State law allowed Solano County Superintendent Dee Alarcon to authorize what is known as a fraud audit after she grew concerned that Vallejo's financial crisis might have been caused, or worsened, by questionable accounting practices.

The audit, which focused heavily on former superintendent Gladys Phillips- Evans and former finance chief Frank Remkiewicz, as well as former human resources chief Kevin Hanks, marks the latest step in the recovery of a district plagued by years of poor management -- and where pupils last year lost counselors, librarians and music teachers and a chance to reduce some student-teacher ratios. It also raises the possibility of criminal charges.

"We believe there's sufficient evidence in this report to warrant an investigation by the district attorney's office," said Fred Forrer, an MGT senior partner. He said the report was built on circumstantial but compelling evidence and was "pretty bad in the scale of things."

Solano County District Attorney Dave Paulson will soon decide whether to pursue charges. His chief investigator, Al Garza, declined to comment on the audit's findings Tuesday but said his office met recently with MGT of America.

Phillips-Evans, who was hired in 2001 and ousted before the takeover, declined comment Tuesday, as did Hanks, who now directs human resources for a large school consultancy in New York.

Remkiewicz, who resigned last January and went on to teach graduate courses in school law and finance for two quarters at Cal State East Bay in Hayward, did not return a telephone message seeking comment. He was the only one of the three school officials to speak with auditors; he denied falsifying budget figures and told auditors that some errors were due to inexperienced staff, according to the audit report.

Richard Damelio, the state-appointed administrator to the $130-million-a- year Vallejo district, wrote in his official response to the audit that he would work to restore the community's trust in the district.

"I am truly saddened that a few have besmirched the reputation of so many and had such a lasting negative impact on this school district, its 18,000 students, its 1,500 staff members and the thousands of citizens who had placed their faith in the school district to educate their children," he wrote.

The audit alleges a pattern of budget distortions by Remkiewicz revolving around his attempt to turn in a balanced budget for the 2003-04 school year.

The district altered financial statements from the previous year to produce a rosier balance, budgeted for state reimbursements that it should've known were not coming, and appears to have shifted debt from a general fund to smaller accounts for things like cafeteria food and adult education, the audit states.

Referring to the projected savings of $4.4 million for staff salaries, auditors wrote, "it appears that the district simply reduced its salary projection by an amount needed to balance its budget."

The audit also places heavy blame on Phillips-Evans, who "had ultimate responsibility for the integrity of the budget." Auditors also accused Phillips-Evans of withholding from the elected school board an October 2003 letter from the Solano County Office of Education objecting to the 2003-04 budget, saying it "appears to be a direct effort to hide the district's financial situation from the board and the community."

The audit raps both Phillips-Evans and Hanks for allegedly allowing teachers without credentials to work in 2001-02 and 2002-03, even after their applications for credentials had been returned by the state and their temporary certificates had expired. The district may have to pay back revenues for student attendance in the teachers' classes.

The superintendent's daughter, Alexis Evans, taught at Solano Middle School for the 2002-03 year, even though staffers and a board member questioned her status, the audits states. Phillips-Evans and Hanks, who knew Alexis Evans before she was hired, gave "preferential treatment to someone with whom they have a close personal relationship," auditors wrote.

The audit also concludes that district officials may have violated state law by awarding an $8.5 million contract for communications services in 2002, without competitive bidding, to Focal Communications of Chicago, which last year merged with Broadwing Corp. of Austin, Texas.

Auditors said the contract price was too high, but that it was not clear what relationship officials had with the company or with any subcontractors. Messages left with two Broadwing officials were not returned Tuesday.

Audit highlights

False accounting: The district projected a 10 percent increase in enrollment, which would have earned it an additional $8 million in state funding, even though it had been losing students; it reduced projected staff salaries by $4.4 million without justification; and it budgeted $327,000 for state reimbursements it should have known were not going to be paid.

Withheld information: The former superintendent withheld from the school board a letter from the Solano County Office of Education in October 2003 objecting to the budget.

Uncredentialed teachers: The district employed five teachers, including the superintendent's daughter, without credentials from 2001 to 2003.

Fiscal Year School District Amount of Loan Outstanding Balance Final Repayment Date
1990-91 West Contra Costa County $28.5 million $16.6 million 2018
2001-02 Emery Unified $2.3 million $1.1 million 2021
2002-03 West Fresno Elementary $2.0 million $1.2 million 2013
2002-03 Oakland Unified $100.0 million $62.2 million 2023
2003-04 Vallejo City Unified $50.0 million $50.0 million 2024

State sees Oakland school district as better

By Nanette Asimov, San Francisco Chronicle, October 4, 2006

Three years after the state took control of the bankrupt Oakland public schools, a progress report finds the district is not yet back on its feet -- but it's better than it was.

The detailed look at the Oakland Unified School District by the state's Fiscal Crisis and Management Assistance Team reads like a thick report card, dividing school district operations into five sections and ranking progress from a low of 1 to a high of 10.

Oakland schools are not required to score 10 in every section, "but the district is expected to make steady progress that can be sustained," according to the 352-page report.

Every time the district scores at least 6 in any section, the Fiscal Crisis and Management Assistance Team will recommend to state schools chief Jack O'Connell that the section be returned to local control.

So far, just one section -- community relations and governance -- has earned a recommendation to return to local control.

The new report praised the Board of Education, which meets in an advisory role, for its efforts to communicate better with parents and to work effectively with one another. But O'Connell is not ready to restore decision making to the Oakland school board, even in the limited area of community relations, said Hilary McLean, his spokeswoman.

"That's what we'll look at this year," she said.

The school board was stripped of decision-making power in 2003 after the district went about $80 million into the red. A state-appointed administrator, Randy Ward, ran the district until he quit in August. O'Connell appointed Kimberly Statham, an Oakland administrator, to take his place.

Here is how the report ranked the Oakland schools' management efforts in all five areas, compared with their ranking in 2003:

  • Community relations and governance: 7, up from 3.9.
  • Facilities: 5.8, up from 1.5.
  • Financial: 5.8, up from 0.7.
  • Personnel: 5.2, up from 2.6.
  • Pupil achievement: 5.2, up from 2.5.

Bill could restore some control to Oakland district

By Steve Geissinger and Grace Rauh, Oakland Tribune, December 5, 2006

SACRAMENTO � Newly sworn-in Assemblyman Sandre Swanson, who replaced termed-out Wilma Chan to represent Oakland and its environs, introduced a bill Monday that would force the state to return some control over schools back to the Oakland school district.

The legislation, Swanson's first, would restore the school board's ability to exercise control over personnel and facilities management, community relations and student achievement. If approved, it would go into effect in January 2008.

"This is the first step to ensuring a quality education for the students of the Oakland Unified School District," said Swanson, a Democrat who represents the 16th Assembly District, which also includes Piedmont and Alameda.

The measure will be the subject of an informational hearing at 7 p.m. Thursday at the Oakland school district office, 1025 Second Ave.

The state took over the Oakland school district in 2003 after it overspent its budget by millions and fell into financial decline. State Superintendent of Public Instruction Jack O'Connell appointed an administrator to run the district until it was determined to be fiscally stable and prepared for self-governance.

The elected school board still attends meetings and advises State Administrator Kimberly Statham, appointed to run the district after former-State Administrator Randolph Ward resigned this summer.

"Our job is to run good schools in every neighborhood, create opportunities for kids and make sure the district's finances are in order, andthat's not going to change," school district spokesman Alex Katz said. Tina Jung, a spokeswoman for the state Department of Education, said she was not prepared to comment on the bill until it had been studied.

The most recent report by the state's Fiscal Crisis and Management Assistance Team, which grades the district's progress, found the district was not ready for the return of local governing control, except in the area of community relations and governance.

Swanson said the school district "has made demonstrable academic improvements over the last few years.

"This year, the district made the largest improvement in Academic Performance Index test scores among the 33 largest unified school districts in California," he said. "The return of local control is essential in our goal to achieve academic excellence."

Despite these gains, Oakland students still score poorly on standardized tests when compared to other California students.

School board President David Kakishiba said he is pleased the bill was introduced, but is disappointed O'Connell has been unwilling to commit to a timeline for the return of local governance.

Kakishiba suspects Swanson introduced the bill because "he thinks nothing is happening" to ensure local governance returns to Oakland.

"I think the concept of returning local authority no later than January 2008 is very sensible and is overdue," Kakishiba said.

"We need to have a sensible transition plan. We can't have local authority returned to us overnight. This is executive transition, and it should be well-thought through and we should all be prepared for it."


By KCBS, July 7, 2007

State Superintendent of Schools Jack O'Connell, whose administration has run the Oakland Unified School District for four years, will return some authority to the district's elected school board, officials said today.

School district spokesman Alex Katz said O'Connell will come to Oakland on Monday to meet with school board members and state lawmakers and announce the return of board control over an area called "community relations and governance."

However, he said the state Department of Education will still manage student achievement, staffing, finances and facilities.

Amber Maltbie, a spokeswoman for Assemblyman Sandre Swanson, D-Oakland, said O'Connell's announcement is "a very positive sign" and "an important first step."

But Maltbie said Swanson still plans to go forward with a bill that would force O'Connell to restore even more control to Oakland's school board.

One June 2, 2003, former Gov. Gray Davis signed a bill authored by state Sen. Don Perata, D-Oakland, which gave the Oakland school district a $100 million loan to pay down an $82 million deficit and cover basic operating costs.

As part of the legislation, control of the school district was turned over to O'Connell and a state-appointed administrator.

Maltbie said Oakland parents, students and teachers have felt "disenfranchised" because many key decisions, such as closing schools and assigning principals, are made by the state administrator and not by the Oakland school board.

She said Swanson's local control bill, which has been approved by the state Assembly, will have a hearing before the state Senate Education Committee on Wednesday.

Maltbie said Swanson is "optimistic" that his bill will be approved by the Education Committee on Wednesday, the Senate Appropriations Committee later this summer and then by the full Senate and Gov. Schwarzenegger in the fall.


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Last modified: July, 2007

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