Policy & Finance > Elections

Despite perilous finances, state laws help schools avert insolvency



Despite having to endure the worst economic crisis in almost a century, only a small number of school districts in California are officially designated as financially troubled.

In a report issued by the California Department of Education, seven districts — including Inglewood Unified near Los Angeles, Paso Robles Joint Unified in San Luis Obispo County, and Vallejo City Unified north of San Francisco — have received a “negative certfication,” meaning that “based on current projections” a school district won’t be able to meet its financial obligations this year or next.

That is the most serious rating a district can receive. Another 120 districts received a “qualified” certification, which means they may not be able to meet their financial obligations at some point over the next three years.

These districts, which includes Los Angeles Unified, the state’s largest, together serve about one-third of California’s 6.2 million public school students.

Yet the “negative” and “qualified” designations obscure the fact that a far larger number of districts in the state — perhaps the majority — are struggling financially.

“The financial emergency facing our schools remains both wide and deep,” Tom Torlakson, California’s superintendent of public instruction, said in a statement. “The deep cuts made to school funding — and looming uncertainties about the future — are driving school districts to the brink of insolvency.”

State laws and procedures — most notably Assembly Bill 1200, passed in 1991 — have succeeded in preventing almost all school districts from actually going insolvent. Only eight districts have become insolvent since the law passed.

“That’s eight out of 1,000 local education agencies in 20 years,” said Joel Montero, CEO of the Fiscal Crisis & Management Team (FCMAT), which helps districts regain their financial stability. “By anyone’s measure, that’s a pretty good record, especially when you consider the financial ups and downs of the state during that time.”

In 1991, after two school districts — Richmond Unified and Compton Unified — faced insolvency and needed a state bail-out loan, lawmakers passed AB 1200. The state wanted to institute an early warning system signaling a district’s financial distress by requiring county offices to review district budgets, said Jeannie Oropeza, state deputy superintendent of public education who has also worked for the Department of Finance.

The law encouraged a back-and-forth system of accountability between districts and their county offices of education so districts — and the state — would not be surprised by sudden insolvencies. Districts must show they can balance their current-year budget and those for the next two years. Twice a year, county offices must certify this is true and file reports with the California Department of Education.

Districts, unlike private enterprises, cannot declare bankruptcy and go out of business. However, districts can become insolvent, which means they can’t meet their financial obligations and the state then must step in, provide them with loans, and appoint a state administrator to run the district.

The number of districts with “negative” or “qualified” certifications in the report published today — seven “negative” and 120 “qualified” — is lower than in the last interim report, when 13 districts had “negative” certifications and 130 had “qualified” ones.

But the number is significantly higher than before the recession, when only 29 districts received “qualified” certifications. That year, seven districts also received “negative” classifications.

Districts with “negative “or “qualified” certifications must work with their county offices to get back on track.

“Once you’re ‘qualified,’ you’ve got the county office’s watchful eye on you,” said Lora Duzyk, past president of the California Association of School Business Officials and assistant superintendent for the San Diego County Office of Education. “The interventions get more intense as you progress to ‘negative’ [certifications]. By the time you are ‘negative,’ the county office pulls out all the stops to keep you from going insolvent.”

But almost all districts receive a “positive certification,” which means the district has enough resources to meet both current needs and fiscal obligations for at least the next two years.

However, getting a “positive” rating doesn’t necessarily mean the district is in good shape financially.

Ken Shelton, chief business officer for the Santa Clara County Office of Education, says many districts are like boats trying to stay afloat as the water rushes in. “You jettison things to get rid of weight,” he said. “At some point, you can’t jettison things anymore, and we’re at that point.”

Tom Armelino, superintendent of the Shasta County Office of Education in Northern California, recently testified at a state Senate Budget and Fiscal Review Committee hearing that five of the 25 school districts that he oversees have “qualified” certifications. If statewide tax initiatives that would provide funding for schools don’t pass, 16 of the districts would receive “qualified” or “negative” certifications, he said. At that point, he added, he would not have enough resources to help them all.

At the same hearing, Kent Bechler, superintendent of Corona-Norco Unified in Riverside County, said even if the tax initiative proposed by Gov. Jerry Brown were to pass in November, most districts would still have to make painful reductions.

“We’re in survival mode,” he said.

For more information about state reporting and fiscal oversight requirements, see fiscal oversight on our website and an EdSource publication, Understanding School District Budgets: A Guide for Local Leaders.

For a discussion of the impact of the state’s budget crisis on K–12 education, see EdSource’s brief, California’s Fiscal Crisis, What does it mean for schools?

Template last modified: