BILL ANALYSIS
AB 1377
Page 1
Date of Hearing: April 15, 2009
ASSEMBLY COMMITTEE ON EDUCATION
Julia Brownley, Chair
AB 1377 (Swanson) - As Introduced: February 27, 2009
SUBJECT : School districts: state receivership: audits
SUMMARY : Requires the Superintendent of Public Instruction (SPI)
to allow a school district, that has been taken over by the SPI
and that has a State Controller (SCO) ordered audit conducted
instead of the required annual audit, an appropriate period of
time in which to address any findings from that audit before
penalties are assessed for those findings.
EXISTING LAW :
1)Establishes a process for state oversight and financial
assistance for school districts in financial trouble.
2)Authorizes the governing board of a school district that
determines that its revenues are insufficient to meet its
current year obligations to request an emergency apportionment
(loan) from the state through the SPI.
3)Requires that acceptance of an emergency loan constitutes
agreement by the school district to specified conditions,
including the following:
a) The SPI assumes all the legal rights, duties, and powers
of the governing board of the district.
b) An audit, for the fiscal year in which the emergency
apportionments are disbursed and each year thereafter, is
to be conducted of the books and accounts of the district,
in lieu of the required annual school district; this audit
may be conducted by the SCO, his or her designee, or an
auditor selected by the district and approved by the SCO.
c) The SPI may appoint an administrator to act on behalf of
the SPI.
d) The school district governing board becomes advisory
only.
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e) The authority of the SPI and the state-appointed
administrator shall continue until specified conditions
have been met, including SPI determination that future
compliance with recovery plans is probable.
4)Requires each local education agency to provide for an annual
audit of its books and accounts, including all fund sources
and expenditures; requires the audit to be completed by a
certified public accountant or a public accountant, licensed
by the California Board of Accountancy, who is deemed by the
SCO as qualified.
5)Establishes the Education Audit Appeals Panel (EAAP) in order
to allow local education agencies to appeal apportionment
significant audit findings to a quasi-judicial panel; also
establishes a process and deadlines that govern EAAP's actions
and provide due process to appellants.
6)Authorizes the SPI and the Director of Finance (DOF) to
jointly establish a repayment plan for a local educational
agency that is required to repay an apportionment significant
audit exception or pay a penalty arising from an audit
exception.
FISCAL EFFECT : Unknown
COMMENTS : The state has developed a process for providing
financial oversight to school districts, and for providing
financial assistance and financial recovery to school districts
in financial trouble. This process is commonly referred to as
the AB 1200 process - a reference to the authorizing
legislation, AB 1200 (Eastin), Chapter 1213, Statutes of 1991.
The potential end result of this process, the granting of an
emergency loan to the school district and the requirement that
the district accept accompanying conditions including assumption
of control of the district by the SPI and the completion of a
SCO conducted audit, has been reached in seven cases: Vallejo
City Unified School District (USD), Oakland USD, West Fresno
Elementary School District (ESD), Emery USD, Compton USD,
Coachella Valley USD, and West Contra Costa (formerly Richmond)
USD. In many other cases the oversight, advice and assistance
provided by the AB 1200 process has been sufficient to pull the
school district out of immediate financial trouble and to
provide time for the governing board of the district to take
those actions necessary to begin a return to a more stable
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fiscal condition.
The statutory requirement that all school districts complete an
annual independent audit of all revenue sources and expenditures
is part of this fiscal oversight process. If as a result of
this audit, or any other, findings of an apportionment
significant nature are made, then the district is required to
repay those funds for which it was ineligible or pay those
penalties associated with the audit finding. An apportionment
significant audit finding is a finding that is equal to or
greater than one unit of average daily attendance, or a finding
that is equal to or greater than the dollar value of one unit of
average daily attendance for the school district. These
repayments and payments can be done as a direct payment from the
district to the state or as an offset taken by the state against
a future apportionment for which the district is eligible.
Prior to this transfer of funds, the school district has seven
options that it can take to respond to the audit finding; the
school district may:
1)Seek a waiver from the State Board of Education - The purpose
of these waivers is to provide flexibility to a school
district or county office of education without undermining the
basic intent of the law. A waiver may be requested for parts
of the California Education Code or the California Code of
Regulations, though some statutes are excluded from the
general waiver authority.
2)Seek a Summary Review from EAAP - For cases involving less
than 150 units of average daily attendance (ADA) or $750,000,
whichever is less, "the executive officer [of EAAP] may waive
or reduce the reimbursement or penalty upon a finding of
substantial compliance and that other remedial measures are
sufficient to induce full compliance in the future."
3)Make an appeal to EAAP - EAAP operates as a quasi-judicial
panel and considers appeals pursuant to the provisions of the
Administrative Procedure Act. EAAP can approve settlements,
make findings of fact and interpretations of law, find there
was substantial compliance and thus waive or reduce the
payment required of the district, or deny the appeal.
4)Take the case to the Office of Administrative Hearings (OAH) -
OAH is a quasi-judicial tribunal that hears cases in which a
governmental entity is a party and that concern issues of
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administrative procedure.
5)Request a repayment plan - The SPI and the DOF are jointly
authorized to establish repayment plans for local educational
agencies that are required to repay an apportionment
significant audit exception or pay a penalty arising from an
audit exception.
6)Amend attendance reports or otherwise correct the issues
identified in the audit finding - In some rare cases this may
reduce the repayment or penalty being assessed, but more often
this is an action taken to reconcile reporting with the audit
finding or to resolve the audit finding with respect to
potential future infractions.
7)Take no further action - The California Department of
Education (CDE) will then either bill the school district for
the funds owed or take an offset against the district's
apportionment at the next Principal Apportionment. Any action
by the CDE to collect these funds will be put on hold as long
as the district is pursuing a course described in 1) through
5) above.
The proposal made in this bill would stay the actions of the CDE
in 7) above for an "appropriate period of time" in order to
allow the school district to address any findings from the audit
conducted immediately upon approval and disbursement of the
emergency loan. In this way, according to the author, "This
bill will create a reasonable period of time for school
districts in state receivership to address without penalty any
audit discrepancies or "findings" that appear as a result of any
audit mandated by the State as part of the process of
receivership." This bill would have been applicable in the
seven historical cases mentioned above, where districts received
emergency loans, and would impact any future district that
reaches the point of accepting an emergency loan and its
associated conditions.
In background materials, the author has stated that, "According
to recent reports by districts that have entered receivership in
the last ten years, these audit findings often uncover the same
irregularities repeated over the course of several years. Each
instance is treated as a separate "finding", and the district is
fined for each of these irregularities accordingly. These
penalties can accumulate to levels that further jeopardize the
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district's recovery, as well as the State's investment in the
district." These comments were reiterated by district officials
testifying before the Assembly Select Committee on School
Financial Takeovers, chaired by the author. The cases of the
seven districts that have entered receivership also reflect
these comments. For example, in the latest case Vallejo USD
received a $60 million emergency loan from the state, is
governed by an administrator appointed by the SPI, and had an
SCO-conducted audit performed; the 2003-04 audit report
included, among others, three findings that cost the district
approximately $1.46 million in disallowed revenues and
expenditures.
In addition the author noted that under this bill, "School
districts that enter receivership may experience savings,
depending on the number of audit findings that occur. The State
would lose a commensurate amount it would otherwise have
received under current law." These statements and subsequent
conversations with the author's staff indicated that the
author's intent with respect to this bill is to allow districts
an "appropriate period of time" to correct the circumstances
that led to the audit finding, and for that finding and its
associated repayment or penalty to be eliminated so as to no
longer be a liability on the school district. In this way the
audit finding will no longer "further jeopardize the district's
recovery." The bill as it is currently drafted does not fulfill
this intent, as the extended period of time allowed for school
districts to correct audit findings will, in most cases, do
nothing to reduce the obligation to repay funds or pay penalties
associated with infractions that occurred in the past; these
corrective actions could prevent further penalties from accruing
in the future, but most apportionment significant audit
exceptions involve the non-recoverable lack of timely actions in
the past. The bill also suffers from technical issues that
would have to be clarified in order for the intent of the bill
to be implemented and for school districts to not be
disadvantaged with respect to existing audit resolution
processes.
If the Committee chooses to pass this bill based on the author's
intent, then staff recommends that the Committee adopt the
following amendments that have been drafted to reflect that
intent and to correct technical issues.
1)Clarify that the condition under which this statute applies is
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upon the appointment of a trustee and completion of the audit,
both following the authorization and disbursement of an
emergency loan for a financially troubled school district.
2)Specify that the "appropriate period of time" within which a
school district may correct audit findings and exceptions is
180 days.
3)Clarify that any corrections made to audit findings during
that 180 day period and any associated reduction in the
repayment of funds or payment of a penalty that would result,
is required to be taken into account by reducing the
district's outstanding liabilities.
4)Prohibit the assessment of any repayment or penalty as a
result of this audit for any finding or exception related to
any fiscal year other than the year in which the funds for the
emergency loan are initially disbursed and the fiscal year
prior to that.
5)Stop the clock, during the 180 day period, on any timelines or
deadlines associated with a request for Summary Review made to
EAAP, an audit appeal filed with EAAP, or a request for a
repayment plan made jointly to the SPI and the DOF.
The primary concern with these amendments from the perspective
of the state would likely be the loss of repaid funds, primarily
General Fund Proposition 98, that would be associated with
allowing districts to be exempt from repayments related to
apportion significant audit findings or payment of other related
penalties.
Previous legislation: SB 1190 (Chesbro), Chapter 53, Statutes of
2004, appropriates $60 million for an emergency loan to the
Vallejo City USD, requires the SPI to assume all the rights,
duties, and powers of the governing board of the Vallejo City
USD and to appoint an administrator to serve during the term of
the loan. AB 1554 (Keene), Chapter 263, Statutes of 2004,
requires that existing emergency loans for the West Contra Costa
USD, Oakland USD and Vallejo City USD be refinanced through
I-Bank, with any difference between interest paid on the
existing loans and the costs of refinancing those loans paid by
the state. AB 1303 (Daucher), Chapter 97, Statutes of 2005,
revises statutes and terms pertaining to the lease financing
that the state is using to replace General Fund financing of
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school district emergency loans. SB 39 (Perata), Chapter 14,
Statutes of 2003, provides Oakland USD with a $100 million loan;
a state administrator was appointed in the district, an
administrator is still serving in that capacity. AB 38 (Reyes),
Chapter 1, Statutes of 2002, provides a $2 million emergency
loan to West Fresno ESD; a state administrator was appointed in
the district. AB 2834 (Migden), Chapter 1128, Statutes of 2002,
revises statutes governing the annual fiscal and compliance
audits of school districts, and establishes EAAP as a separate
state agency. Assembly Bill 1115 (Strom-Martin), Chapter 78,
Statutes of 1999, authorizes the SPI and the DOF to jointly
establish repayment plans for local educational agencies that
are required to repay an apportionment significant audit
exception or pay a penalty arising from an audit exception. AB
1200 (Eastin), Chapter 1213, Statutes of 1991, established the
AB 1200 process for fiscal oversight of school districts.
REGISTERED SUPPORT / OPPOSITION :
Support
Oakland Federation of Teachers (American Federation of Teachers,
Local 771)
Oakland Unified School District
Opposition
None on file
Analysis Prepared by : Gerald Shelton / ED. / (916) 319-2087