Investigations Continue As San Ysidro Schools’ Financial Picture Improves
Wednesday, September 2, 2015
Credit: Megan Wood, inewsource
The San Ysidro School District recently emerged from almost two years of near-bankruptcy. Some board members still question how that happened and what was going on with the district's finances.
Rodolfo Linares had his first inside look at the San Ysidro School District when he noticed his son’s school computers were broken.
“I offered my services to fix computers, laptops that were broken at Sunset Elementary,” he said. “I offered my services, it’s something I’m good at.”
At first, his offer to help was refused. Linares said the new principal at Sunset, Efrain Burciaga, asked him to wait while he settled into the job. About four months later, in mid-2014, according to Linares, he got the OK, and he fixed 30 computers.
“I saw the need, I volunteered,” he said. “That’s when I started seeing things that were not right.”
What he saw was a district careening toward bankruptcy. Administrators, as well as fiscal advisers, warned that it faced imminent financial collapse.
The district – which serves 4,800 students, many of whom are low income English-language learners – certainly was on the edge, but never went into bankruptcy. And by early 2015, it had remedied some of the overall financial problems and pulled its credit rating out of near-junk status.
How it managed to do that is just one of the controversies that has roiled the district over the past three years. A financial adviser from the county says the district was helped by some lucky breaks from the state, while San Ysidro’s former chief financial officer says it was thanks to hundreds of individual cost-saving measures.
At least some on the board, the majority of whom were elected after the worst of the problems began to ease, question the budgeting process and the accuracy of the dire financial predictions. Linares is now one of those board members.
“You project deficits, but in the end there’s a surplus,” he said. “How do you reconcile those big, huge differences?”
Antonio Martinez, president of the San Ysidro board, said the biggest problem was a failure to communicate. He believes the board was in the dark about some of the finances, and that lack of transparency damaged the district’s relationship with the community, which was most apparent in a three-day teachers strike in the fall of 2014.
At the same time, criminal charges in corruption scandals were brought against the previous superintendent and a board member.
The district faced “the perception of corruption,” Martinez said. “We have a brand new board now, and we’re looking to build it up, but we still have that perception.”
San Ysidro is working to repair its image and build a fiscally sound budget — it recently presented its first budget since emerging from what's called "negative certification," an unwelcome designation that had been in place since the 2012-13 fiscal year. And there is still internal strife: board member Jose Barajas, who was facing a possible recall, resigned last week, saying he wanted to save the district further turmoil.
As the district moves forward, it is still haunted by questions about who, or what, saved it from what had seemed like a certain death spiral. Some of the answers might reveal if San Ysidro is out of trouble for good or if this is just a respite before bankruptcy seems imminent once more.
Financial red flags
The San Ysidro School District hugs the border with Mexico, covering the southern part of the city of San Diego and part of the unincorporated area east of Otay Mesa. Its 4,800 students in kindergarten through eighth grade are spread out across seven schools.
The district is overwhelmingly Hispanic, and about 65 percent of students are English-language learners. About 4 in 5 students in the district are socioeconomically disadvantaged. Its newest school, Vista Del Mar Elementary, opened in 2012 and was paid for with controversial capital appreciation bonds.
During the fiscal year, school districts throughout the county submit interim reports to the San Diego County Office of Education (SDCOE). These are basically financial report cards that also give administrators an opportunity to tweak their projects as more information about funding and expenses becomes available.
Districts give themselves a grade: positive, qualified or negative certification. If the county office disagrees, it can change the grade. The district can accept it or appeal to California’s state superintendent of public instruction.
In March 2013, San Ysidro submitted a negative certification, the clearest sign that its finances were not in order.
Negative certification means “a district will be unable to meet its financial obligations for the remainder of the current year or for the subsequent fiscal year,” according to the California Department of Education.
San Diego County Superintendent of Schools Randolph Ward appointed a fiscal adviser to the district. He selected Lora Duzyk, SDCOE’s assistant superintendent of business services. Although she didn’t have the power to force the district to adopt any actions, she was able to essentially veto any expenditures by the district.
Her role, she said, was “to advise the district and be the eyes and ears of the county superintendent of schools.”
Duzyk, with Brent Watson, executive director of the county office’s business advisory services, were to attend school board and administration cabinet meetings. San Ysidro also was required to file a third interim report covering the district’s finances from April 30 to July 1, 2013.
During that time, the district was spending more money than it was bringing in from state funds and property taxes. That meant it was cutting into its emergency reserves, bringing them below the state-required level of 3 percent.
Of bigger concern to Duzyk was the district’s cash levels. Financial reports from district, county and independent auditors warned that San Ysidro would run out of cash, progressively, by April or May 2014, February 2015 and June 2016.
“When you run out of cash, now you’re really in jeopardy because that means you don’t pay payroll,” she said.
As Linares became more involved with the San Ysidro School District, he reached out to the teachers’ union to get support for a slate of candidates to run against sitting school board members.
“If we get three candidates and we have the support of the union and parents,” Linares said, “we could take control over the district. And then we could change things.”
Although he didn’t originally plan to, Linares joined the slate in 2014 and was elected alongside Marcos Diaz and Luciana Corrales, who was not part of the slate. Then-President Jason Wells received the lowest number of votes of five candidates.
Linares approached his role as a newly minted board member from his background in business.
“I’m not an expert on budgets, I’m not a (certified public accountant),” he said. "But I’m a businessman. I’ve been doing business all my life, ever since I was 22 years old.”
Linares said he opened his first business, a service station, in Los Angeles. He eventually relocated to Victorville, in the high desert of San Bernardino County, where he owned “several rental units,” as well as a garage employing multiple mechanics. He also owned used car dealerships and finance companies.
That experience, he said, prepared him to understand budgets and finance in a way others might not.
“I used to buy businesses that were bankrupt, I push through the business and the first thing I do is see where I am,” Linares said. “Make an audit of everything and assess everything. And replace personnel that’s not good.”
“That’s exactly what we did here (at the district),” he said. Among the actions Diaz and he took, Linares said, was asking the then interim superintendent, George Cameron, to resign. Cameron stepped down in January 2015 citing personal reasons, according to NBC7.
Linares’ internal assessment also turned up one of the most controversial questions among the district administration, the county and the board, as well as the teachers’ union.
According to Linares, San Ysidro had a history of projecting large budget deficits that never came to pass. An inewsource analysis of financial reports from the district confirmed that in the years the district was under a fiscal adviser, the end-of-year balance for the district was significantly better than originally projected.
Why? At least some of the answer comes from the way school budgets are prepared. Budgets are basically educated guesses about how much money a district expects to receive and spend during the fiscal year.
“Every year when the budget is built they build it based on assumptions about critical things,” said Bill Kowba, who was San Diego Unified’s superintendent until his retirement two years ago. “Assumptions about utility costs, assumptions about enrollment, assumptions about salaries.”
Any miscalculations or changing information can throw off the district’s budget for that year. One of the assumptions for a school district is how much state money it will receive. So when the governor revises the state budget, that affects individual district budgets.
For fiscal year 2012-13 — the year the San Ysidro district went into negative certification — the original budget approved projected a $2.3 million deficit. Instead, the district ended the year with a $760,000 deficit.
Revenues ended up being 1.5 percent lower than expected; expenses went down by more, 5.4 percent.
The following year, 2013-14, the district predicted a $5.7 million shortfall. During the course of the year, the district narrowed its projected shortfall to as little as $3.6 million. San Ysidro, however, ended the year with a $700,000 surplus.
How the district managed to avoid massive deficits, and even wind up in the black in a year when it was supposed to be a breath away from collapse, depends on whom you ask.
Dena Whittington is the assistant superintendent of business services at San Ysidro School District. Her responsibilities included building the district’s budgets and interim reports. Whittington constructed San Ysidro’s budget and financial reports since before the district went into negative certification. She was placed on leave pending an internal investigation on Aug. 24, 2015. Whittington resigned soon after.
Julio Fonseca, the district's current superintendent, said in a statement the district would continue the investigation begun before Whittington’s resignation. He would not comment further, citing the potential for litigation resulting from the investigation.
According to Whittington, a key source of discrepancies between the budget and the actual money spent comes from grants to individual departments within the district. If a department gets a $1 million grant, for example, the budget projects that all of that money will be spent. If the department only spends $500,000 of the grant, it looks like a big saving for the district.
An independent audit conducted for fiscal year 2013-14 pointed out the mismatches in the district’s budget. The audit mirrored Whittington’s analysis, saying “variances primarily result from expenditure-driven federal and state grants that are included in the budget at their full amounts.”
Even teacher vacancies can result in cost savings for a district because substitute teachers are cheaper than permanent educators. In an interview before her resignation, Whittington said those savings are based on decisions made by individual departments and programs throughout the district.
“Some of it’s in the district’s control, and some of it’s not,” she said. “But there’s no $5 million answer. There’s thousands of $50 answers, $100 answers.”
The district investigates all mismatches between the projections and reality, Whittington said. The analysis of “every change that happened even in one fiscal year,” Whittington said, “I mean it’s going to be as thick as a phone book.”
SDCOE’s financial adviser, Duzyk, pointed at other internal and external sources for San Ysidro’s better-than-expected finances. She said the district benefited from moving money around, and from some lucky breaks at the state level. For fiscal year 2011-12, she said, the district was able to do a one-time transfer of money out of savings to cover a budget shortfall.
Then, California’s economy improved and more money started to flow into schools.
The first lucky break, Duzyk said, was the passage of Proposition 30 in 2012. That sales and income tax increase, promoted by Gov. Jerry Brown, was expected to prevent $6 billion in cuts to education in the state.
For San Ysidro, it “meant that they didn’t have to cut more and have a midyear cut,” Duzyk said. “So that helped them tremendously that the state budget picture turned around.”
Neither of those explanations dealt with the heart of the teachers’ union’s and Linares’ questions, which centered on one category.
Books and supplies
“The history on San Ysidro is that we spend between $1 million, and one-and-a-half on books and supplies,” Linares said. “But it was always projected, four, five, six, in this case $6.4 million on the budget.”
Linares is talking about fiscal year 2014-15, when San Ysidro set aside $6.6 million in one expense category, books and supplies. By the third interim report the district was again required to produce, it had reduced the budgeted amount to $4 million.
That history of budgeting significantly more in books and supplies than the district has ended up spending goes back to at least fiscal year 2012-13. That year, San Ysidro set aside $2.5 million for expenses in books and supplies. It ended up spending less than half that: $1.2 million.
Again, in 2013-14, the district budgeted $2.6 million for books and supplies. By its third interim report, which covered the district’s finances from July 1 to April 30, the district had raised its projection to $4.2 million in that one category, despite the fact it had only spent $650,000.
In the end, the district spent $1 million in books and supplies that year. The $3.2 million gap between projected and actual money spent was $440,000 short of being enough to close the district’s entire budget shortfall.
Books and supplies budgeting has been an especially heated point of contention between the administration and the teachers’ union and even some board members.
During 2014, the district was in negotiations with the San Ysidro Education Association for a new contract. In March, both sides agreed to fact-finding by the Public Employment Relations Board to help settle the disagreements.
That report stated that the union’s main concern was the belief that the district was in a better financial position than it presented.
“There is a history of the District showing a large deficit as part of its budgets leading up to the end of the fiscal year,” the report says. “However, when the fiscal year ends, there not only is no deficit, but rather there is usually significant positive ending balance.”
“The Association points to this history and asserts the District is ‘hiding’ money so it can ‘lowball’ the Association during negotiations,” the report said.
According to the report, the district countered that these swings came from changes by the state government at the end of the year. The report also noted that the SDCOE had placed San Ysidro under a fiscal adviser because it determined the district couldn’t meet its financial obligations.
In the end, the report agreed with the SDCOE’s analysis of the health of San Ysidro’s finances.
“Considering its role and expertise, the findings and recommendations of the SDCOE are entitled to great deference,” the report said. “In light of the foregoing, I hereby find that the District is facing a financial crisis and has an ‘inability to maintain the status quo’ with regard to employee compensation.”
Whittington and Duzyk refute the union’s claim that the district was somehow hiding money in the books and supplies category. That money, they contend, was meant for specific students, primarily lower-income and English learners, and was clearly set aside in books and supplies until the district decided how to spend it.
When she was building that year’s budget, Whittington said she didn’t have any information from the rest of the district about how this special category of funds money was going to be spent, so she put it into books and supplies.
The staff in charge of the budgeting at other districts “probably had feedback that ‘OK, we’re going to use $1 million of it in staffing, and $400,000 in books and supplies and another $400,000 in equipment,’” Whittington said. “That year in our district I didn’t have that information.”
That move, according to Duzyk, was communicated to the board and members of the community. It was not, she said, an attempt to hide the money.
“She was very clear in all of her board presentations and everything she did that that money was money that was set aside for those kids and that that line item resided in books and supplies,” Duzyk said.
In May, just a few weeks from the end of the 2013-14 fiscal year, the state allowed districts to use those funds however they saw necessary. That meant the district suddenly had a chunk of unrestricted money.
“So we had booked $1.8 million of expenditures that with one action of Sacramento we were able to remove from the budget, so that was the majority of the swing for that year,” Whittington said.
Martinez, the current board president, said he didn’t feel it was clear why that money couldn’t be used.
The issue, he said, was a “lack of transparency and lack of communication.”
Linares agreed, contending that if administrators knew where the district really stood financially they didn’t share it.
“I’m a businessman, I work on budgets and I know. When I need to spend money, I call my CPA,” he said. “Where we are, how much can we spend. And here, we don’t have that.”
Financial experts familiar with San Ysidro’s budgets questioned putting the money for special students in the books and supplies category.
“It wasn’t my decision to put them in books and supplies,” Whittington said. She said she discussed where to put the money with other top administrators in the district and was “directed” to put it there. The only individual with the authority to direct Whittington was the interim superintendent at the time, Gloria Madera.
Whittington said she had to put the money somewhere because she didn’t have any information about how it would actually be spent. She never considered whether it was possible to place the money as an earmarked item in the reserves.
The 2013-14 budget was created under the direction of the Madera. She stepped down as interim superintendent in March 2014, returning to her job as assistant superintendent of educational services. She was placed on leave pending an internal investigation earlier this year.
Getting out of negative
The district was finally able to get out of negative certification midway through the fiscal year 2014-15. That happened with the district’s third interim superintendent in two years, Edward Velasquez.
Linares said he heard of Velasquez through a friend in Victorville, an education advocate named Steven Figueroa. According to Linares, he and Figueroa got involved with school districts there in 1989.
Figueroa said Linares was instrumental in finding fiscal mismanagement in the local elementary school district. He also worked with parents who reported allegations of molestation by a teacher at the Victorville Elementary School District.
Linares went to a conference in San Francisco to meet Velasquez, and when he got back, he presented him as a candidate for interim superintendent. Velasquez, according to Linares, had the experience with troubled districts that San Ysidro needed. Eventually Velasquez met with Martinez and the teachers’ union and was hired as interim superintendent in February 2015.
Velasquez was replaced by Fonseca, the district’s first permanent superintendent since early 2013, in June of this year.
The district originally submitted a positive certification for its second interim report, citing a reworked budget that helped close the shortfall and maintain the required emergency reserves.
One of the key changes was the cancellation of programs funded by state money targeted at special students — English-language learners and low-income students — because there was not enough time to carry them out before the end of the school year.
Those programs included $440,000 for 22 “impact teachers.” The number of teachers was projected to double in the next two years despite declining student enrollment. About $730,000 was cut from a program to expand Internet access at the district.
In total $1.4 million was moved from those programs and used in other parts of the district. That money, Whittington said, was enough to balance the district’s budget for the year.
The SDCOE downgraded the district to a qualified certification, citing concerns including a lack of permanent leadership, pending litigation and “ineffective communication.” The district unsuccessfully appealed the change to the state superintendent of public instruction.
Whittington presented the improved finances at a March 12 board meeting. At the time she said the information to get the district out of negative certification had been available since at least December.
“With different leadership we maybe could have done it sooner,” she told the board.
Pressed by the board president, Martinez, Whittington said the district could have known which programs couldn’t be carried out before the end of the school year as early as the first interim report. That would have freed up that money for other uses in the district earlier.
In a recent interview, Whittington said she brought up the option to cancel those programs and get out of negative certification during the district’s cabinet meeting, which included a representative from the SDCOE.
According to Whittington, she was directed by the interim superintendent at the time, George Cameron, to keep the programs in the budget because everything was in place to have them off the ground when students returned from winter break.
The cabinet, Whittington said, knew this decision would keep the district in negative certification.
Cameron said he didn’t believe that money could be used as part of the unrestricted funds for the district because it was targeted for specific students.
Peter Wong is the chief financial officer at Lynwood Unified School District in Los Angeles County. He was asked by Velasquez to provide a third-party analysis of the district’s second interim report in 2015. He said the district didn’t get out of negative certification because of any improvements to the way it does business.
“I think the so-called improvement is not necessarily anything to do with the district reducing its operations. It has more to do, from my standpoint, (with) the fact that the first interim might have exaggerated the bad financial health the district was actually experiencing,” he said.
According to Wong, more accurate finances were the primary, but not necessarily only, improvement from the first to the second interim report that finally got the district out of negative certification.
“I think the projections are more aligned with reality in the second interim,” he said.
‘Going Broke is Expensive’
In December 2013, Whittington presented the district’s first interim report for fiscal year 2013-14 to the board. In her presentation, she included a slide titled “Going Broke is Expensive.” She listed the cost of a fiscal adviser, credit downgrades and decreased attendance.
The district underwent a near-total wipeout of its credit rating while in negative certification. Fitch Ratings and Standard & Poor’s downgraded the district’s general obligation bonds from A+ to BBB+ and BBB-, respectively. Both ratings are just above junk status.
San Ysidro’s Martinez said one of the biggest costs of the negative certification was less tangible. There was “a sense of hopelessness” during that time, he said.
“You have the county’s perspective telling us that we’re going to go bankrupt. We had our assistant sup(erintendent) of business services (Whittington) complying and saying 'yes we’re going to go bankrupt,'” he said. “And then we had every superintendent that we’ve had since then telling us that we’re going to go bankrupt.”
According to Martinez, the conversation during that time centered almost completely on making salary cuts to keep the district afloat.
“The only explanation that I was given is that cuts needed to be made and that cuts essentially had to be made on staff salaries,” he said. “That was really the directive.”
The SDCOE agreed that the fiscal troubles and subsequent strike had hurt the district’s relationship with teachers. It listed “staff unrest and/or low morale” as one of the reasons it changed the district’s certification to qualified in March 2015.
Duzyk, SDCOE’s fiscal adviser for the district, said the fiscal strains, as well as two pending lawsuits against the district, were hurting the relationship with the community. One included a breach of contract claim by a solar company, and the other came from parents alleging the use of harmful pesticides at one of the district’s schools.
“The community was very upset over several of the lawsuits, about what was happening, nobody could understand where the money went ... how did they get in such a bad place,” she said.
Martinez blames a “lack of transparency and lack of communication” and believes Whittington, the assistant superintendent of business services, was responsible.
“But given that she was given direction from the county, the county’s job was to get us out of negative certification, to help us through this,” he said. “That was her role.”
Linares said that he thinks the “county was directly involved in the management of the district.”
“A fiscal adviser’s job is to see what’s wrong with the district.” Linares said. “I don’t see anything that she (Duzyk) did to benefit the district. If the budget is wrong, it’s her job, she’s the overseer. That didn’t happen.”
Duzyk, however, says she and the county were only there to provide guidance.
“I can’t make them do anything, they’re the ones that have to make the decisions,” she said. “They’re the ones that decide and then I can give them my opinion and I did, very freely give them my opinion about things.”
While Duzyk, as fiscal adviser, can’t force the district to adopt a specific action, she has the power to veto any decisions made by the board if she thinks it will affect the district’s finances.
Linares knows there is much more to be done in the district, and he is committed to putting in the work.
His son, a special-needs student, graduated this year from Sunset Elementary, where he had been since kindergarten, and began middle school.
The child is actually his grandson, but when his own son was imprisoned and the mother left, Linares and his wife legally adopted the then 3-month-old baby. They had originally planned to move to Tijuana from Victorville, but moved to San Ysidro where they believed he would receive better treatment for his autism.
Linares said it’s his son, and the other kids at the district, that keep him focused on moving San Ysidro in what he considers to be the right direction.
“We’re given the kids and that’s our future and I take this very serious,” he said. “If I’m an advocate for kids, my own kid, I have a vested interest so I have to do the best I can.”
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