After a year of dire warnings, California’s largest school district, Los Angeles Unified, is finally taking steps to address budget deficits projected to exceed a half billion dollars by the 2019-20 school year.
As her first major undertaking since replacing Ramon Cortines in January, Superintendent Michelle King has appointed four staff working groups to tackle long-standing structural issues threatening to drive the district over a financial cliff. The trouble awaits even as the state economy is improving, more money is reaching the district through Gov. Brown’s Local Control Funding Formula and the school board is taking a new hard line against the growth of independent charter schools.
“This is the first major stress test of a balanced approach for the district,” said board president Steve Zimmer. “We need to recognize the need for an ongoing cultural shift toward austerity while simultaneously there has to be strategic investment.”
L.A. Unified is not alone in grappling with projected deficits, although not all for the same reasons. The deficits are painful reminders that even in what seem like good times, budgetary pain for some districts may not be far away.
In California, L.A. Unified is currently one of 16 districts, including other large ones like Oakland Unified and San Diego Unified, that received a “qualified certification” from the state, which means they are in jeopardy of not meeting their financial obligations through 2017-18. An additional four received a more serious “negative certification,” which means they are in serious financial jeopardy this year or next.
But because of its size, L.A. Unified’s total deficit projections easily outrank all the others, according to Robert Miyashiro, vice president of School Services of California, a Sacramento-based consulting firm that helps districts around the state negotiate contracts with teachers and others.
L.A. Unified is the second-largest school district in the country after New York City, serving 550,000 students in nearly 1,300 schools, more than 200 of them independent charters, the most in any school district in the nation. For the current school year, the district budget is based on $11.2 billion in total revenue, about half of it, $5.2 billion, arriving through the Local Control Funding Formula – about $1 billion of those funds are designated “supplemental” and “concentration” funds for low-income students, English learners and foster children. The rest of the district’s budget comes from an array of federal, state and local programs and bond sales.
“We’re looking for long-term sustainability,” said John Walsh, L.A. Unified’s deputy chief financial officer. “A number of ideas, some are doable now, like reducing the teaching pool. Other strategies will require some hard thinking, like dealing with benefit packages.”
For now, the district’s outlook is rosy, with budgets this year and next projected to end in surplus. But officials have long known that future expenditures would outstrip revenue, an outlook that took on a new urgency in November when a panel of outside experts appointed by the board examined district finances and concluded that future deficits could reach $600 million by 2019-20. In a sobering report that placed the largest blame on declining enrollment, soaring pension and benefit costs and the growth of charter schools, the panel offered dozens of recommendations designed to save more than $700 million. That led King to appoint groups to study four areas — special education, attendance and enrollment, staff benefits and business operations — to figure out how to get there.
The overall mission, John Walsh, L.A. Unified’s deputy chief financial officer, said in an interview, is to “present a framework of strategies” to the superintendent and board to formulate policies moving forward.
“The charge is not to look at one or two or three years,” he said. “We’re looking for long-term sustainability. A number of ideas, some are doable now, like reducing the teaching pool. Other strategies will require some hard thinking, like dealing with benefit packages.”
No deadlines are in place to enact change. But district officials concede that they have little time to waste: A projected deficit of $72.2 million for 2017-18 could reach $450 million the following year and $600 million the next.
Revenue that the district receives from the state, which makes up the bulk of its budget, is largely based on students’ average daily attendance. Fueled by a decline in birthrates and the lure of charter schools, L.A. Unified’s non-charter student population has fallen by 100,000 over the past six years, which the outside panel said represents a loss of nearly $900 million. The annual enrollment decline is expected to continue at nearly 3 percent a year.
Among students who are enrolled, average daily attendance, on which state revenues are calculated, is 94 percent, or 1.2 percent below the statewide average. Just meeting the statewide average would generate another $45 million a year, the experts said.
The growth of charter schools in the district is a byproduct of board actions. For years, the members routinely approved new charter applications and renewals without much debate. As a result, L.A. Unified became a petri dish for charter operators, who are now serving more than 15 percent of all students in the district.
That number would likely expand under a plan from Eli Broad, the billionaire philanthropist, that was leaked last summer. His foundation has contributed millions of dollars across the country to education reform efforts and is now turning attention to his hometown through a group known as Great Public Schools Now. The plan was initially framed to double the number of charters in the district within eight years, with the goal of serving half the district student population.
While few additional details have emerged, officials of the new group now say more charters would be only a part of a larger effort to support “quality schools” within the district.
In any case, the board and union leaders representing district employees have attacked the plan with strong words and action — the board passed a largely symbolic condemnation of the plan, and unions have staged rallies around the city to spur public outrage. At the same time, fearful of more charters draining money from the district treasury, the board has put away its rubber stamp and is now denying charters’ requests with greater frequency. Barely half are winning approval this year, which has led charter leaders to accuse the district of “witch hunts” to find any reason, no matter how small, to stave off further charter growth.
Last week, Superintendent King said she intended to hold a charter summit, of sorts, to get all sides pulling in the same direction. So far, nothing has been scheduled.
The growth of charters and decline in enrollment are exacerbating the expenditure side of the district’s problems, barely a year after United Teachers Los Angeles, which represents more than 30,000 district teachers, threatened to strike before winning a new contract that increases pay by 10 percent over two years.
The union is now digging in for its next fight, preserving pensions and benefits, which the panel of experts recommended reducing. By offering early retirement for older teachers and offering less generous benefits, the panel estimated that the district could save as much as $500 million a year.
Other factors over which the board has no control could also shape future policy changes.
One of them is the uncertainty over the extension of Proposition 30, a 2012 ballot initiative that raised state sales tax by a quarter percent and the income tax on high earners. Together, they have generated $7.5 billion a year in new revenue, most of it going to public education through the Local Control Funding Formula, which was designed to provide more money for high-needs students and is scheduled to be fully funded by 2020-21.
A new initiative to extend the income tax but not the sales tax, which expires this year, goes before voters in November if enough signatures are collected to get it on the ballot. Currently, it has about 25 percent of the 91,740 needed, according to the California Secretary of State.
Not that passage would necessarily help L.A. Unified avoid a deep budget hole. As the panel of outsiders wrote, “The possible extension of the Proposition 30 tax increases alone will not resolve the District’s deteriorating financial condition, but will only help keep a bad situation from becoming a catastrophe in three-to-five years.”
Economic uncertainties, too, will influence the speed with which L.A. Unified moves to break even. California remains near the bottom among states in per-student funding, even with the boost many districts receive from the Local Control Funding Formula, which sends districts fewer additional dollars each year to reach full funding. An economic downturn could reduce the dollars available.
“We have a healthier profile now than we’ve seen in a decade,” Megan Reilly, the district’s CFO, told the board last week. She was referring to the current fiscal year and the next. Then she explained the outlook for the years beyond. Neither she nor the board members were smiling.
Editor’s note: John Gray, the president of School Services of California, is president of EdSource’s Board of Directors.