'Cold Hard Truth': Why San Diego County Schools Are In The Red
SAN DIEGO, CA -- As students return to classrooms this month for another year of reading, writing and arithmetic, school districts in San Diego County will be grappling with math problems of their own: How to make ends meet in an era of escalating costs.
Although California’s record $139 billion state budget earmarks $57.3 billion for K-12 schools, including $8.5 billion from sources other than the general fund, this meager 3.5 percent increase in spending does little to alleviate the continuing struggle by school districts to avoid drowning in red ink. On average, overall expenses have jumped more than 30 percent over the past six years in the 17 San Diego County school districts Patch covers.
Michael Simonson, chief business officer for the county’s Office of Education, attributes most of the financial problems to three primary factors: dwindling enrollment, growing special education expenses and spiraling retirement costs.
“Those are the three legitimate, huge costs affecting school districts,” Simonson said. “That’s the cold hard truth.”
Disappearing Students
Besides a decrease in the number of students enrolling in school, a growing number of students aren’t showing up for classes. That reduces the amount of state funding provided under a patchwork of laws that base the amount of money on the number of students actually sitting in classrooms – a district’s Average Daily Attendance (ADA).
Because around 60 percent of a district’s revenues come from the state, any decrease in ADA can result in the potential loss of millions. Local property taxes account for about 25 percent of school revenue, federal funds amount to about 10 percent with the remainder from other sources.
County school officials estimate between three and five percent of the students are absent from class on any given school day. Available statistics show that between the 2014 and 2017 school years, ADA in the 17 Patch school districts fell by eight percent or 24,000 students, while enrollment dropped by less than one percent.
This combination of falling enrollment and plunging ADA can create the perfect storm for school district financial managers because unrestricted state funding per student averages $11,000.
“If you’re looking at losing 200 to 300 kids a year, you can’t shed costs at the same rate you lose a student,” Simonson said. “When you don’t have the kids to sustain enrollment, it’s really a tough situation to be in.
“Enrollment is the primary metric, however if a district noticed a considerable decline in the ADA to enrollment percentage they would definitely want to focus their attention to finding out why kids are out of school,” he said.
Costly Special Education
State and federal laws guarantee equal opportunity to educational programs for all students, including those who have special needs. But this mandate comes at costs that have skyrocketed over the past few years, putting extra stress on school district finances because increasing numbers of students require special accommodations.
During the 2017 school year, an estimated 754,000 California students – about one in ten, or 12 percent – had disabilities affecting their education, according to the state Legislative Analyst’s Office. The LAO reported the most common learning disabilities were dyslexia, speech and language impairments.
Although students diagnosed with autism continue to account for just a small percentage of total K-12 enrollment, the numbers have increased precipitously. Since 2000 the number of autistic students in California public schools alone jumped 650 percent from 14,000 to 105,000 in 2017, according to the LAO.
The impact of special education on school budgets has been gigantic. A sampling of districts in Patch communities found costs for providing special education services jumped by more than 50 percent, with one district reporting a 78.6 percent increase over the period from 2013 to 2017.
Oceanside Unified reported special education expenses of $22.4 million in 2017, a five-year increase of 74 percent. Tiny Lemon Grove School District, with an enrollment averaging 3,800 total students, reported a 78.6 percent jump in the amount it paid for special education.
While the federal government contributes toward local special education costs, the bulk of the funding comes from local and state sources. During 2017, the Oceanside District, with 2,629 special education students, spent $52.5 million with just $3.7 million coming from federal sources. Local taxpayers ponied up the remainder ($29.7 million) along with the state, which kicked in $19 million. This same cost-sharing scenario is duplicated in virtually every other district.
Collectively, the magnitude of the growing costs to provide these increasingly necessary services is not lost on school officials desperately trying to balance budgets when special education outlays account for nearly 20 percent or more of a district’s total expenses. Even the $3.9 billion for special education in the current state budget won’t solve the problem.
“The quantity of students and the severity of costs that districts are dealing with has increased significantly over time,” Simonson said. “It costs more to educate students with disabilities, and the costs aren’t being picked up by the federal or state government.”
When the federal Education of Handicapped Children Act was passed in 1975 (its name changed in 1990 to Individuals with Disabilities Education Act) Simonson said the federal and state governments were each going to pay 40 percent with local school districts providing the rest.
Because the federal government has failed to uphold its commitment, local districts are straddled with the extra expense, Simonson said.
Pricey Retirement
If there is one major factor driving these increased costs and posing future threats to the financial viability of school districts, it’s the expense incurred for providing employee pensions and Other Post Retirement Benefits (OPEB) – retiree healthcare, life insurance, dental care and other benefits that may have been negotiated in union contracts.
“It’s a substantial concern,” says Simonson. “The cost of pensions have increased dramatically for both employer and employee — more than double per school district.”
This growing pension expense can be directly attributed to the increasing amounts that must be contributed to the California State Teachers Retirement System (CalSTRS) and the California State Public Employees Retirement System (CalPERS).
This year, school districts must contribute 16.3 percent of their payroll for employees participating in CalSTRS, an amount that will leap to 19.1 percent by 2021. Contributions to CalPERS will be 18 percent, up from 15.5 percent last year. Employees themselves must also contribute through paycheck deductions: 10.2 percent for CalSTRS; 6 to 7 percent for CalPERS.
An analysis of the most recent audited financial data from the 17 San Diego County school districts covered by Patch shows that during 2017 these districts collectively paid $258.5 million to CalSTRS and CalPERS. This doesn’t include $129.4 million in additional payments made directly from the state’s general fund to CalSTRS “on-behalf” of the districts.
Four districts — San Diego Unified, Sweetwater Union High, Poway Unified and Oceanside Unified — accounted for almost three-quarters of this amount. In addition, the districts collectively paid another $20 million for OPEB.
These mounting retirement costs won’t end anytime soon, if ever. Preliminary data for the 2018 school year ended in June show the districts spent about $954.5 million on employee benefits of all kinds – including pensions, OPEB and healthcare. Budgets approved for the current school year reflect an anticipated increase in these costs of about five percent to $1 billion.
“That’s a huge impact, there’s no doubt about it,” Simonson said. “There’s a question if we’re receiving money, should we be spending it on today’s kids, not someone who worked for us 10 years ago.”
While annual pensions exceeding $200,000 per year for some California public employees has drawn attention, the average yearly pension for teachers is about $54,000. For school employees covered by CalPERS, its $34,512. By comparison, the top maximum Social Security benefit paid in 2017 was $32,244 before deductions for Medicare.
Yet the growing current costs of pensions and OPEB are just part of the threat to a school district’s future financial stability. What poses an equal if not greater challenge to cash strapped districts are their unfunded retirement liabilities – the difference between future obligations school districts have to retirees and the amount of money available to pay those benefits.
For years, the magnitude of these mounting obligations has been hidden in the fine print of footnotes to annual financial statements, almost invisible to taxpayers who have neither the time nor inclination to pore over hundreds of pages of numbers.
But changes in reporting requirements by the Governmental Accounting Standards Board (GASB) — the independent organization that sets accounting and financial reporting standards for governments — will require school districts to more prominently disclose those liabilities beginning this year.
At the same time, just like earlier requirements for reporting pension costs, GASB outlined procedures for amortizing – or paying off – outstanding OPEB debt over a 30-year period by calculating annual payments to include an amount to pay down the debt, something akin to paying off a home mortgage. What this means for school districts is simply having to budget additional funds to pay not only for current retirees, but the OPEB debt as well. The Patch districts have unfunded OPEB liabilities totaling $447 million, with the Sweetwater School District accounting for $102 million.
The Poster Child
If there’s a poster child for fiscal challenges facing California school districts it would be Poway Unified, the third largest district in San Diego County, which serves the city of Poway, parts of San Diego and some unincorporated areas. The district has historically enjoyed a reputation for desirable educational programs and test scores consistently exceeding statewide standards in both math and English.
Yet Poway suffers the same fiscal ailments as many of its neighbors: deficits created by increasing wages, retirement and special education costs that must be paid from declining revenues. Of course, many of these afflictions are magnified by its size and past excesses.
During the 2017 school year, for which its most recent financial statements are available, Poway paid $217.4 million in salaries and $87.7 in benefits -- 60 percent of its $360.5 million in total general fund expenses. The district paid $81 million for services to its 4,457 special education pupils, including $3.5 million for students sent to specialized private schools or facilities, some as far away as Utah.
An August 2017 review of the district’s special education program by the Financial Crisis & Management Assistance Team (FCMAT), a state service designed to provide school districts with financial and management advice, produced several recommendations for improvement. The team suggested Poway develop strategies to reduce its reliance on costly outside service providers, noting those expenses totaled $13.6 million during the previous three school years.
However, Poway school officials say students are sent out of state only after intensive evaluation by teams of specialists who determine a student’s behavioral or mental health needs require placement at a more restrictive intensive therapeutic residential facility. Just two students were placed in Utah facilities last year.
The cost of transporting special education students and the stress it placed on the General Fun also drew the team’s attention. During the 2017 school year, Poway paid $5.5 million for special education transportation, an amount exceeded only by Oceanside Unified, which spent $5.7 million.
Michael Fine, FCMAT’s chief executive officer, with a bird’s eye view of districts statewide, said the objective isn’t always about simply containing special education costs.
If a student enters preschool with behavioral issues or a severe disabilities and the teacher doesn’t have a variety of tools to intervene, then they refer them to special education, but it doesn’t always have to get that far, Fine explained.
“If there are good systems in place schoolwide, you can tackle that before sending the student to special education,” Fine said. “A number of kids get sent to special education just based on behavioral issues. If there are good systems in place schoolwide, you can tackle that before sending the student to special education.”
Fine characterized San Diego County as a “tad unique because it doesn’t offer any special education programs providing instructional services for kids, forcing districts to send particular students to non-public schools,” something that adds significant transportation and other costs.
“We need to bring programs back into the district so they are not sending students out to high-priced facilities,” Fine said.
"I know we do have a fair number of students that go to schools outside of their neighborhood, outside of our district, so it’s a rather long commute,” said school board member Kimberley Beatty. “Often times, our special education students, for their own safety, usually have an aide on the bus with them."
Post-Traumatic Stress
But unlike other districts Poway has the added burden of crushing long-term debt, a legacy left by the administration of former superintendent John Collins who was ousted in 2016 for misappropriating district funds. The lingering trauma of his profligate borrowing and spending will take decades to heal.
During Collins’ tenure as assistant superintendent, and later as the top dog, the district succumbed to the siren song of investment bankers, selling General Obligation and other bonds that saddled district taxpayers with nearly $1.6 billion in interest by the time they’re paid off over the next 35 years.
Poway Unified grabbed national attention with its infamous $105 million bond issue in 2011 after it was reported that interest on that bond issue alone would be $876.6 million and that the obligation couldn’t be refunded at lower interest rates. Many of the school buildings refurbished with the money will most likely require additional upgrades by the time the debt is paid off, if not before.
Other California school districts – including a few Patch districts -- were also seduced into issuing Capital Appreciation Bonds during that era by investment bankers, consultants and lawyers who themselves reaped millions on the deals. However, none of these districts came close to the magnitude of Poway.
At the end of the 2017 fiscal year, the most recent audit available, Poway reported its outstanding principal on general obligation was $484 million. In addition, the district has another $480.9 million outstanding in Special Tax Revenue Bonds issued to fund school improvements in 15 special districts that’s being repaid with specific assessments on property owners in those individual areas. Interest on this debt will total an estimated $332.5 million over the life of those bonds.
When the district’s total bond debt is combined with additional obligations for retirement liabilities another $450 million is added, exacerbating its annual budgeting headaches.
Beatty, who joined the board in 2012 after the damage was done, said the former administration sold voters by devising a way to create “ballooned debt” that had the illusion of not increasing property taxes.
Cleaning up the mess is “a sticky situation,” Beatty said.
“Our current board has hired financial advisers to do some preliminary research on the feasibility of buying back some of the bonds,” Beatty told Patch. “All along I’ve been very pessimistic about that because of the non-callable feature of the bonds.
“Any bondholder is going to insist they get the current market value for their bonds if they were to sell them back to the district so there really aren’t any savings to glean. The only benefit is to just transfer the tax burden from future homeowners to current homeowners. I had always hoped the state would look into how this was all done in the first place and find a way out.”
Special Education and long-term debt aside, Poway’s immediate expenses continue to escalate and revenues can’t keep up.
In 2017 Poway had general fund revenues of $354.7 million, $6 million less than it spent. When the books are balanced for the 2018 school year, the district expects to see that shortfall jump to $17 million. This year Poway predicts the deficit will be just $1.6 million.
This imbalance isn’t lost on Beatty, who admits the district is spending “faster than we’re bringing it in, and our structural deficit is just getting worse.”
Beatty, the longest-serving member, joined with her colleague, Charles Sellers, in voting against the current budget last June, arguing personnel costs were too high.
“I thought it was an immoral budget. It disproportionately allocated $19 million to staff compensation with just $3 million going to the students, Beatty said. “The budget was against students and programs, and I thought it was unconscionable. My grievance was: This is lopsided and fiscally imprudent.”
Beatty believes employee compensation costs can be substantially reduced by starting to prune from the top, saying the district has added considerable management staff during the past year, including two new superintendent positions, one of which she supported.
“We need to look at bloated management and find where we can streamline programs and responsibilities and really assess areas where we can make greater efficiencies,” Beatty said. “I think we’re top heavy. It’s gotten worse than it was during the Collins era.”
Special Correspondent Bob Porterfield contributed to this story/Main photo via Shutterstock
Have a question about school budgets? Email hoa.quach@patch.com
