Oakland Unified chided for ‘highly unusual’ and ‘suspicious’ fiscal practices

June 13, 2018

Oakland Unified operates 83 elementary, middle and high schools, as well as alternative, special education and adult education programs.

Oakland Unified has enough money to pay its bills through the end of the year, but the way it has spent its money and reported its budget has raised red flags for an independent agency that evaluated its finances.

In doing the analysis, the agency ran into evidence of “intentional manipulation of the general fund balance” so that it maintained minimally required state reserve levels. These inappropriate transfers in and out of its general fund “hindered an honest and open assessment of the district’s current financial condition by its current leadership and outside agencies,” the report concludes. “These practices are highly unusual, could be considered suspicious and should be further investigated.”

The report says the district’s general fund “has substantial off-book interfund borrowing that must be thoroughly audited, quantified and repaid.”

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This means the district was borrowing from funds such as its self-insurance fund to boost the general fund balance, but wasn’t booking it accurately in its financial records, said Michael Fine, CEO of the independent Fiscal Crisis and Management Assistance Team, or FCMAT, which conducted the analysis. “You can get away with” borrowing from self-insurance funds “once in a while,” he said, “but doing it off-book isn’t a good idea. You should be reconciling the borrowing.”

And while a budget shortfall forced the district to cut $9 million this school year, the budget analysis revealed that the district might not actually have made all of those cuts.

The outside team analyzed the district’s finances in response to a request from the Alameda County Office of Education, which oversees the district’s budget, to determine whether Oakland Unified had enough money to meet its obligations through June. Last year, the district entered into an agreement with FCMAT for a separate fiscal health analysis, which concluded that the district showed signs of fiscal distress.

The more recent May 31 analysis concluded that the district does have enough money to pay its bills through the end of its fiscal year on June 30 — and through June 2019 if it contains costs and takes advantage of short-term borrowing. However, the report noted that Oakland Unified is in “financial distress” because it is overspending, dipping into its reserves to make ends meet and has inappropriately borrowed money from restricted funds that it must pay back. The district’s level of deficit-spending is “not sustainable,” the report concludes. Although the district will spend $546.4 million this year, it will only receive $535.7 million in revenues, according to the report.

Oakland Superintendent Kyla Johnson-Trammell said the board asked for the initial review last spring around the same time that it hired her as superintendent. “We are in the beginning stages of improvement, but we have started implementing changes that were called for in FCMAT’s original analysis,” she said, adding that the first report “laid the groundwork for our current Fiscal Vitality Plan“.

The practices cited in the first report occurred before she was promoted to superintendent, after spending 18 years in the district as a teacher and administrator.

The Alameda County Office of Education called the findings of the most recent report “concerning,” but also noted that the analysis helped establish that the district can meet its cash obligations through 2019.

“However, we know there continue to be difficult decisions ahead for Oakland Unified, decisions that will need to be backed by strong internal controls to ensure their effectiveness,” said Michelle Smith-McDonald, spokeswoman for the county office of education. “We will continue to provide support to…Oakland Unified as they address some of the past practices revealed in the report and to ensure the fiscal health of the district in order to best serve the students and families of Oakland.”

She said the report poses “legitimate questions” and has been forwarded to the California Department of Education and the State Controller’s office. The county office of education does not have the power to impose any penalties for the cited practices.

Fine said the May 31 report revealed “financial statement misrepresentation” that made the district’s general fund look more positive than it actually was. He said this could mislead the community and even district leadership about where the budget stands.

He said he didn’t believe anyone at the district misappropriated funds for personal gain. However, the report said the general fund balance was manipulated to give the appearance the district was meeting its state-mandated 2 percent reserve.

“I don’t believe it was criminal,” he said. “But it was intentional. It wasn’t an accident.”

The stinging FCMAT report released last August pointed to multiple reasons for Oakland’s budget travails, including exceedingly high special education costs, loss of funds due to thousands of students attending charter schools and poor financial management by district leaders.

The district’s new finance team includes Wayne Hilty, a temporary Chief Financial Officer hired in January who is working with finance experts from WestEd, an independent education consulting company, to help support the district’s new Fiscal Vitality Plan, Johnson-Trammell said. The board “certified spending reductions for the 2017-18 school year” and recently hired Marcus Battle as its new Chief Business Officer from the East Side Union High School District, who will bring “decades of experience in finance, mostly in educational institutions,” to Oakland Unified, she added.

Theresa Harrington/EdSource Today

Marcus Battle, left, Oakland Unified’s new chief business officer, speaks to Superintendent Kyla Johnson-Trammell.

New district policies and procedures include weekly monitoring of hiring and overtime, added internal controls on contracts and improved financial forecasting for current and future years, Johnson-Trammell said. In addition, the district is transitioning to a new Escape financial and payroll system.

“We are proud of the work we have done so far, but we know that we have only just begun,” she said. “It is clear that we must focus not only on getting our district on solid financial ground, but on ensuring that our long-term planning, protocols and practices effectively keep us from encountering such challenges again in the future. We look forward to more guidance from FCMAT and partnership with ACOE (the Alameda County Office of Education). The information in this report will provide us important guideposts for completing the long-term work essential for fiscal health and sustainability.”

Fine said he’s especially troubled by the district’s regression to past unsound fiscal practices because Oakland Unified now has a new leadership team, including Johnson-Trammell, “that is trying to do everything right,” but “has been working a little bit in the dark.” The board appointed Johnson-Trammell to her post effective July 1, after former Superintendent Antwan Wilson left to run Washington, D.C. schools.

“You’ve got district leadership who’s trying to right this ship and get it moving in the right direction and they don’t know the accuracy of the data they’re looking at,” Fine said. “My biggest concern is that the district wasn’t acknowledging where it was at and therefore wasn’t making decisions based on factual information.”

In evaluating $9 million in midyear reductions the board has reported it made, FCMAT found that some employees who were laid off were subsequently kept on and that the district could not fully substantiate the cuts. The report said FCMAT did not count the midyear cuts in its assessment of the district’s bottom line because the district has a history of failing to adhere to its spending reductions and has weak internal controls. In addition, the district laid off business department employees who could have helped contain costs and failed to lay off as many other employees as originally intended, the report said.

“These actions call into question both the district’s and its board’s political will to implement the proposed $9 million in expenditure reductions,” the report said. “Without evidence to support that the board can withstand both public and internal pressure to continue its past practices, FCMAT cannot assume that cost reductions will occur.” 

The district had previously recovered from being taken over by the state in 2003 due to fiscal distress, when it received a $100 million state bailout loan, which it is still paying off. Although Oakland Unified’s superintendent and school board now control the district, a state trustee who is supposed to oversee spending and who has veto authority over its financial decisions is still in place.

“They’ve got a new team in place on the finance side and they’re continuing to build that team,” Fine said. “The district is doing a lot of stuff right. They’re doing a lot to move forward and correct this under Kyla’s leadership. Kudos to them. But, they’re going to have to press forward and there are tough decisions yet to make.”

Past misleading financial statements could impact the district’s relationship with the investor community and ratings agencies, Fine added.

Oakland Unified recently asked the state Department of Finance to defer its $6 million in annual state loan payments to help it balance its budget, but FCMAT determined that the district did not need this kind of bailout right now. In addition, the district was hoping for relief through the state budget process, which did not materialize.

“They’ve been saying they’re out of cash,” Fine said. “At some point, they’ve got to step up and do what they can themselves.”

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