Archive for July, 2009

School districts are often considered the safest investments in the tax exempt markets. They receive from 20-90% of their funding from their state governments, most of the rest from property taxes.  So what to worry? Well, state governments, whose revenues react most quickly to economic changes, are having trouble. (Excellent coverage of state troubles at http://rockinst.org).

Take California for example. It is unlikely that school districts there will be spared the budget ax.  Districts teetering on the edge of financial balance will face the most trouble.   As California legislators battle to resolve their $20+ billion deficit, we took a look at that state’s school district watch list.  Every six months the California Department of Education examines school district fiscal status and posts a list of districts that have received a “negative certification” and “qualified certification”.   According to their website: http://www.cde.ca.gov/fg/fi/ir/second0809.asp:

“A negative certification is assigned to a school district or county office of education when it is determined that, based upon current projections, the school district or county office of education will not meet its financial obligations for fiscal year 2008-09 or 2009-10.”

Sounds dire.  19 districts received negative certification in the second half of 2008-2009. This is 12 more than last year at this time — although four came off last year’s list and one moved down to “qualified”.  Since it is every state’s obligation under the U.S. Constitution to maintain a free public school system we are not worried that the worst off will actually go out of business. They can’t. States have the ability to take over and run a failing school district whether for financial or operational reasons.  This type of receivership often also comes with emergency loans. But cutbacks and the latest emergency distraction will make it more difficult for districts to get attention in the statehouse.

In California, the Infrastructure Bank made loans to three school districts: Vallejo City USD, West Contra Costa USD and Oakland USD. The good news is that these school districts cannot file bankruptcy as long as the state Infrastructure Bank bonds are outstanding. (West Contra Costa did file Chapter 9 bankruptcy in 1991 under its former name, Richmond USD.)

We decided to pull one of these to look deeper into the status of the negative certification.  What’s in a name?  Vallejo City itself is is battling for its financial life in Chapter 9 bankruptcy so we decided to look at their school district (a separately financed and governed entity). The school district has been on the state’s negative list for a few years now.  In 2004 when the district faced a $27 million deficit, district leaders requested an emergency apportionment from the state. A state administrator was appointed with powers to:

terminate the employment of certain District personnel, to enter into agreements on behalf of the School District, and to change any existing District rules, regulations, policies or practices

According to June, 2008 state data Vallejo City USD had drawn down $60 million ($50 million in 2004 and $10 million in 2007) and has about $42.7 million outstanding loan balances. As of the district’s latest audit, June 30, 2007 (filed by the state in February 2009) the district had a total of $191 million long-term debt outstanding. About 60% is general obligation and debt from the Community Facilities District #2. District GO bonds are insured by Financial Security Assurance (FSA) and the CFD bonds are insured by Syncora.

Following takeover, the state’s “Fiscal Crisis and Management Assistance Team” (FCMAT) springs into action. FCMAT examines the district top to bottom each year until functions are able to be returned to the district. Most of Vallejo’s operating functions have shown enough improvement to be returned to district control. This is with the notable exception of financial management. Four years on, the FCMAT’s sixth progress report shows that budgeting and finance in the district is still below par. Two items that stand out: the district continues to have difficulty counting noses and has a lower than desirable ratio of ADA (average daily attendance) to enrollment (either too many kids are absent when they count or the district is failing to count all of their students in attendance). Counting noses accurately is key for receipt of per pupil state aid. Second, budget and financial management are still weak. There are now new people in the business office and there appears to be a trend of improvement.

With the state hunting for funds from every corner and distracted by its own fiscal troubles the oversight umbrella will likely weaken. Vallejo City USD and its watch-list neighbors have some tough times ahead.