BILL ANALYSIS �
AB 609
Page 1
Date of Hearing: May 4, 2011
ASSEMBLY COMMITTEE ON EDUCATION
Julia Brownley, Chair
AB 609 (Swanson) - As Amended: April 25, 2011
AS PROPOSED TO BE AMENDED
SUBJECT : Oakland Unified School District: audits: emergency
loan deductions
SUMMARY : Requires the Oakland Unified School District (OUSD)
to be released from any fine or penalty resulting from an audit
conducted by the State Controller's Office (SCO) performed for
any fiscal year that falls between June 16, 2003, and June 28,
2009, inclusive.
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
from the state through the Superintendent of Public
Instruction (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 until
the district is solvent, is to be conducted of the books
and accounts of the district, in lieu of the required
annual school district; this audit is required to 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, who becomes an
employee of the district, to act on behalf of the SPI with
respect to governing the district.
d) The school district governing board becomes advisory
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only.
e) The authority of the SPI and the state-appointed
administrator continues until specified conditions have
been met, including SPI determination that future
compliance with recovery plans is probable.
FISCAL EFFECT : Unknown
COMMENTS : This bill proposes to release OUSD from any
requirement that makes the district subject to, or to pay for,
any fine or penalty imposed as a result of audits performed by
the SCO, or his or her designee, during the time in which the
legal rights, duties, and powers of the district's governing
board were transferred to the SPI and to the state-appointed
administrator of the district. This transfer of authorities and
powers occurred between June 16, 2003, when an emergency
apportionment was made to OUSD, and Jun 28, 2009 when control of
the district was returned to the OUSD governing board.
According to the author, "As a result of findings contained in
the Controller's audits for fiscal years 2002-03 through
2006-07, the District has been required to repay approximately
$2 million to the State in repayments, fines and penalties. In
addition, for fiscal year 2006-07, there are $3.4 million in
potential additional fines pending. Since June 2004, the
District has paid $1.3 million in legal, accounting and
technical fees to defend against the audit findings by the SCO.
The Controller's audit for 2007-08 is not yet final, but the
District expects that it too will recommend significant
repayments and/or penalties. SCO has not commenced its audit of
fiscal year 2008-09 or 2009-10. OUSD hopes to receive timely
audit information and feedback for fiscal years 2007-08 through
2009-10 to ensure that any audit findings are addressed as soon
as possible."
According to the California Department of Education, OUSD has
paid nearly $2.7 million in disallowances, fines and penalties
for audits conducted for the 2002-03 through 2006-07 fiscal year
(see table below). In addition, OUSD has one finding from the
audit of the 2006-07 fiscal year still pending with the
Education Audit Appeals Panel; it appears that this remaining
2006-07 finding could result in a disallowance of between
$550,827 and $1.3 million. Though the final audit reports for
annual school district audits, which are conducted under
Education Code Section 42010 for districts that have not
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received an emergency apportionment, are required by statute to
be completed by December 15 of the fiscal year following the
year under audit, the SCO has yet to release the final audit
reports of the audits conducted in OUSD for fiscal years 2007-08
and 2008-09. When the SCO releases these final audit reports it
is likely that audit findings for those fiscal years will lead
to additional disallowances, fines or penalties being imposed on
OUSD. The SCO also has not released its audit report on the
audit of the 2009-10 fiscal year; it is possible that this audit
could also make findings related to prior years and lead to
financial penalties for OUSD.
-------------------------------------------------------
| Fiscal | Date | Net State Funding | Amount Paid to |
| Year | Report | Returned to State | State on |
| | Issued | Due to Audit | Appealed |
| | | Findings |Findings |
|--------+--------+-------------------+-----------------|
|2002-03 |6/18/200| $911,856 |$911,856 |
| |4 | | |
|--------+--------+-------------------+-----------------|
|2003-04 |11/8/200| $734,039 | $810,690 |
| |5 | | |
|--------+--------+-------------------+-----------------|
|2004-05 |2/14/200| $495,099 | $495,099 |
| |7 | | |
|--------+--------+-------------------+-----------------|
|2005-06*|8/21/200| ($408,616) | $305,000 |
| |8 | | |
|--------+--------+-------------------+-----------------|
|2006-07*|2/4/2010| $283,464 | $153,070 |
|* | | | |
|--------+--------+-------------------+-----------------|
|2007-08 |Not | | |
| |Issued | | |
|--------+--------+-------------------+-----------------|
|2008-09 |Not | | |
| |Issued | | |
|--------+--------+-------------------+-----------------|
|2009-10 |Not | | |
| |Issued | | |
|--------+--------+-------------------+-----------------|
| Total | | $2,015,842 | $2,675,715 |
-------------------------------------------------------
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--------------------------------------------------------
|* In 2005-06, the audit report contained findings |
|allowing OUSD additional funding due to under claimed |
|average daily attendance. |
|** One 2006-07 Administrator/Teacher ratio finding is |
|under appeal. SCO's calculation disallows $1.3 million, |
|OUSD's calculation disallows $550,827 |
--------------------------------------------------------
The author makes two apparent arguments in favor of the proposal
to release OUSD from any fine or penalty resulting from an audit
conducted for any fiscal year that falls between June 16, 2003,
and June 28, 2009, when he says, "audits conducted by the State
Controller for the period when the State Administrator was in
control of OUSD have had the unintended impact of punishing the
District now for State Administrator actions during the previous
period when the State Administrator was in control." �italics
added by the author]
The first argument is that the fiscal impact of the audit
findings during the period in which the "State Administrator"
controlled the district led to these audit findings, and thus
the district is not at fault. This argument may not be
compelling. When a school district voluntarily requests an
emergency apportionment to keep the district from insolvency,
the conditions of the apportionment or loan are clear. One of
those conditions is that the state appoints a district
administrator, who then serves as both the superintendent and
governing board of that district. The state-appointed
administrator, during his or her tenure in the district, is an
employee of the district, and is paid by the district in the
same manner as a superintendent would be a paid employee. When
a school district is audited and findings are made, it is the
district, not the individual (whether it be a superintendent or
a state-appointed administrator), that is responsible for the
findings. In addition, audit findings most often point to
structural issues, such as breakdowns in fiscal systems
including internal controls, data collection and reporting, or
asset management; the audit findings that have been made in
audits of other districts with emergency loans have most often
been of this nature, and the bulk of the audit findings in OUSD
over the period in question have certainly been consistent with
this observation. Systemic audit findings do not come into
being overnight or even within the span of a limited number of
fiscal years; in fact, this type of audit finding, in the cases
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of districts receiving emergency loans, extend back in time and
are often seen as part of what led to the fiscal collapse of the
district. In other words, systemic audit findings in districts
receiving emergency loans should not be surprising, since there
have been systemic governance and fiscal control problems in
each of the 8 cases prior to the loan being made and continuing
into the years immediately following the granting of the
emergency loan. The audit findings, and their associated
penalties, provide both the accountability and incentive that
leads to changes in the decisions or systems that originally
failed those districts, and it is clearly in the state's
interest to have the district make those changes.
The author's second argument is that once the state recognizes
that a school district is insolvent and requires additional
state funds, in the form of an emergency apportionment, then
conducting audits that generate findings that require the
multi-million dollar repayment of funds in the form of fines and
penalties appears to be punitive in nature. These repayments
clearly make it more difficult for the district in fiscal
distress to climb out of the situation in which it already finds
itself, takes away funding (being provided by the state in the
first place) that would have been used to correct the fiscal
status of the district and to rebuild the instructional program
for the district's students. In short, the fiscal impact of
these audit findings can be seen as a form of 'kicking the
district while it is down'; unfortunately, while the district
remains down, the pupils in that district continue to suffer
from the diversion of financial resources away from the
classroom in order to pay for audit-related penalties and fines.
This bill asks the Committee to balance these two perspectives
in favor of a school district, OUSD, that is trying to recover
from its historical distress by rebuilding its instructional and
administrative programs.
Background on state emergency loans : As a result of court
decisions (see Butt v. State of California, 1992) giving the
state the ultimate responsibility for ensuring the equitable
provision of public education to all pupils, including those in
financially failing school districts, and the resulting early
experiences with districts on the verge of insolvency, the state
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
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is commonly referred to as the AB 1200 process - a reference to
the initial 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 eight cases (see table below). Six of those
loans are still outstanding. In many other cases the oversight,
advice and assistance provided by county offices of education
and other fiscal advisors under 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 fiscal condition without the need for an
emergency loan. The table below summarizes the status of
emergency loans as reported by the California Department of
Education (CDE) on July 2, 2010.
----------------------------------------------------------------------
| District | Year |Loan authorized |Balance owed | Rate |
| | Authorized | | | |
|---------------+---------------+----------------+-------------+-------|
|King City | 2009 | up to | $5,000,000 | 1.00% |
|JUHSD | | $13,000,000| | |
|---------------+---------------+----------------+-------------+-------|
|Vallejo City | 2004 | $60,000,000| $45,480,517| 1.50% |
|USD | | | | |
|---------------+---------------+----------------+-------------+-------|
|Oakland USD | 2003 | $100,000,000| $73,754,847| 1.78% |
|---------------+---------------+----------------+-------------+-------|
|West Fresno | 2003 | $2,000,000| $549,988| 1.93% |
|ESD | | | | |
|---------------+---------------+----------------+-------------+-------|
|Emery USD | 2001 | $2,300,000| $902,924| 4.19% |
|---------------+---------------+----------------+-------------+-------|
|W. Contra | 1990 | $28,525,000| $10,627,181| 1.53% |
|Costa USD | | | | |
|---------------+---------------+----------------+-------------+-------|
|Compton USD | 1993 | $19,951,259| $0| n/a |
|---------------+---------------+----------------+-------------+-------|
|Coachella | 1992 | $7,300,000| $0|n/a |
|Valley USD | | | | |
----------------------------------------------------------------------
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Background on OUSD's fiscal condition : According to OUSD in
2003, district officials became aware of a negative general fund
balance for the 2001-02 fiscal year, and of potential deficits
in its 2002-03 budget, in August 2001. The district projected at
the time that it would run out of cash in May of 2003 and be
unable to pay school employees. In 1999, OUSD had negotiated a
24.4% teacher salary increase to be phased in over three years,
and had also been, from 1999 to 2003, suffering declining
enrollment that translated to a loss of between $15 and $22
million in annual revenues. Despite making budget cuts for the
2002-03 fiscal year that the district believed would save
approximately $31 million, the district continued to project a
negative fund balance at the close of the 2002-03 fiscal year;
at that point the OUSD governing board requested an emergency
loan from the state.
SB 39 (Perata), Chapter 14, Statutes of 2003, appropriated $100
million for an emergency loan to OUSD, and required the SPI to
assume all the rights, duties, and powers of the governing board
of the district and to appoint an administrator to act on behalf
of the SPI in exercising authority over the school district. The
bill authorized the administrator, with the approval of the SPI,
to enter into agreements on behalf of the school district and to
change any existing district rules, policies, or practices, as
provided; the authority of the SPI and the administrator over
the school district were to continue until certain conditions
were met, including the completion of an improvement plan for
the district. The bill required the Kern County Office Fiscal
Crisis and Management Assistance Team (FCMAT) to prepare an
improvement plan for the school district by July 1, 2003, and to
report on the implementation of the plan in written progress
reports until September 2004; budget actions subsequently
extended these reports through 2008. The bill required the
district to repay the loan as a straight line loan amortized
over a 20-year term, with interest as provided, and required the
district, except as specified, to bear 100% of all costs
associated with implementing its provisions. In its Sixth
Progress Report issued in December 2008, FCMAT found that the
district had met the required conditions, and recommended that
the SPI consider returning the remaining operational areas to
control of the governing board. By mid-2009, the SPI had acted
on those recommendations from FCMAT and returned all operational
areas to the control of the OUSD governing board; a
state-appointed trustee remains in the district. SB 39 also
required OUSD's annual audits to be conducted by the SCO, or the
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SCO's designee.
OUSD was one of 97 local educational agencies in the state that
received a qualified certification of its financial status at
the 2010-11 First Interim Report provided by the California
Department of Education. A qualified certification is assigned
to a school district or county office of education when it is
determined that, based upon current projections, the school
district or county office of education may not meet its
financial obligations for current or two subsequent fiscal
years. Thirteen other school districts received a negative
certification, which is assigned to a school district or county
office of education when it is determined that, based upon
current projections, the school district or county office of
education will not meet its financial obligations for the
current and/or next fiscal year.
According to OUSD, the district has undertaken a number of
activities to fix reporting and internal control systems that
had been lacking in the district. For example, OUSD is
undertaking a performance audit, is reconciling cash on a
monthly basis, has consolidated business and operations
functions in order to ensure that internal controls and
compliance monitoring are in place and functioning, is tracking
compliance with federal reporting requirements, has assigned
specific staff to attendance accounting responsibilities, has
put controls in place to monitor school lunch program
eligibility, has improved asset management and tracking, has
tightened procurement and contracting practices, and has
improved compliance with teacher misassignment requirements -
most of these issues have led to or been the subject of audit
findings in past audits of OUSD.
Committee amendments : In addition to the amendments that narrow
the bill to the provisions noted in the Summary section of this
analysis, Committee staff recommends the following amendment:
This bill releases OUSD from any audit fine or penalty resulting
from a finding related to "any fiscal year that falls between
June 16, 2003 and June 28, 2009." This language has unclear
meaning, since school district audits are performed for fiscal
years that start on July 1 and end on June 30 of each year; thus
it is unclear whether the bill intends this to mean that the
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district is released from the impact of findings related to the
2002-03 fiscal year and from the 2008-09 fiscal year. Since the
justification for this provision is that it covers the period of
time that the SPI's state-appointed administrator controlled the
district, it is clear that what happened during the 2002-03
fiscal year (except for the final two weeks of the fiscal year)
was not on the watch of the state-appointed administrator, while
what happened during the 2008-09 fiscal year (except for the
final two days) was. Committee staff recommends that this
confusion be clarified by applying this provision to the 2003-04
through 2008-09 fiscal years, inclusive.
Committee staff also recommends that the Committee consider
whether there is a need for legislation in the future that
examines the role, nature, and timeliness of SCO conducted
audits of school districts that have received emergency
apportionments.
Previous legislation: AB 1754 (Swanson), held by the author in
the Assembly Education Committee in 2010, extends, from 20 years
to 30 years, the period within which the General Fund portion of
the emergency loan provided to Oakland Unified School District
(OUSD) must be repaid. AB 791 (Swanson), held in the Senate
Education Committee in 2009, would have established a process
for the return of all rights, duties and powers to the governing
board of OUSD. AB 1377 (Swanson), held in the Assembly
Appropriations Committee in 2009, would have required the
Superintendent of Public Instruction to allow a school district,
that has been taken over by the SPI and that has a State
Controller (SCO) ordered audit conducted, 180 days in which to
address findings from that audit before any penalties are
assessed. AB 45 (Swanson), vetoed in 2007, was substantially
similar to AB 791. SB 39 (Perata), Chapter 14, Statutes of
2003, provides OUSD with a $100 million loan and requires the
appointment of a state administrator. AB 1200 (Eastin), Chapter
1213, Statutes of 1991, established the AB 1200 process for
fiscal oversight of school districts.
REGISTERED SUPPORT / OPPOSITION :
Support
Alameda Labor Council, AFL-CIO
American Federation of State, County and Municipal Employees,
AFL-CIO
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American Federation of State, County and Municipal Employees,
Local 257
Berkeley Organizing Congregations to Action
California Teachers Association
Oakland Community Organizations
Oakland Education Association
PICO California
Service Employees International Union, Local 1021
United Administrators of Oakland Schools
Opposition
None on file
Analysis Prepared by : Gerald Shelton / ED. / (916) 319-2087