Chief Financial Officer Megan Reilly posed that question as she explained the intricacies of the budget and laid out new numbers at Tuesday’s special board meeting.

For example, she pointed out that by the end of the recession in 2009, the state was paying the district only about $5,200 per student. By the 2018-2019 school year, that number is expected to increase to $11,557 per student. That is due to the Local Control Funding Formula, which directs more money to lower-income and high-needs students.

While that sounds like good news, Reilly pointed out that fixed costs will rise, taking up more of the budget in coming years.

“It’s complicated,” Reilly told the school board in the first of about four special sessions to explain the budget and explore possible solutions. “But the big impact is that deficit drivers will take up a larger chunk of the unrestricted general fund.”

Today, in the 2015-2016 school year, 24 percent of the budget is spent on fixed costs such as pensions, retiree benefits and special education. By 2020-2021 it will be 33 percent of the budget.

“But it will be slowing down,” Reilly said. “The enrollment decline will overtake us in 2018-2019 and the LCFF will get less.” That’s why the district is in trouble unless action is taken.

This is also one of the reasons why some district officials and board members are worried about the increase in charter schools. The LCFF money goes with the students, and if they transfer to a charter school, those dollars follow them. At the moment, 100,000 students are enrolled in the 211 independent charters that are overseen by LA Unified.

The district staff will explain to the school board their plans to decrease the deficit drivers at future meetings when they explore special education, pension costs and retired benefit costs. Even with enrollment going down, some of the fixed expenses will remain the same. For example, special education represents 16 percent of the budget, but it will increase to 20 percent. Reilly said the district doesn’t get adequate funding for special education in relationship to its cost, and she recommended that the district lobby for more money for it.

“We got a lot of good feedback,” Superintendent Michelle King said after Tuesday’s meeting. “We will have three or four more deep dive meetings that will be very rich in terms of information and you will se the comprehensive picture.”

Chief Financial Officer Megan Reilly

LA Unified expects this to be its best budget year in a decade, school officials said Tuesday, but board members urged immediate action to address a deficit in three years that could reach half a billion dollars.

“This is the healthiest year in the past decade,” Chief Financial Officer Megan Reilly said in a report to the school board. “For the first time since 2008, this is the first budget without a need for a fiscal plan.”

Reilly also reported that the district had reduced by more than $200 million a projected budget deficit in two years.

Last June, the district was projecting a $340 million deficit by the 2017-2018 school year, and in December that prediction was changed to $225 million. Now that deficit is expected to be less than $100 million. It’s possible it may be as low as a $72.2 million deficit, Reilly reported.

While Reilly reported that the district will have an unassigned ending balance surplus of $129 million this year, she warned that the budget benefited from one-time payments from the state totaling about $170 million, which was owed to the district, and that those funds cannot be depended on for long-term fiscal stability. “On a cautionary note, waiting for one-time funds to plug up that hole is not good for the ongoing deficit,” Reilly said.

The general fund’s balance is projected to be $1.2 billion as of June.

But after congratulatory statements from other board members, Monica Ratliff asked about a slide that had not been presented that addresses a potential $450 million deficit in three years due to declining enrollment and increasing fixed costs, including pension costs, legal liability and other post-employment benefits.

Student enrollment is expected to decline in 2018-2019 by three percent.

Ratliff, who chairs the Budget, Facilities and Audit Committee, urged the board to address the deficit and wanted more transparency.

Board member Richard Vladovic also called for immediate attention to the projected deficit.

“That is a half a billion dollars,” Vladovic said. “I recommend that the superintendent deal with that now. I’m very concerned. We have to note that 86 cents of every dollar goes to people, that’s for salary, health benefits and more.”

“I don’t want to do anything now that will be hurting people years from now,” Ratliff added.

Addressing that deficit in three years, Reilly said, “We have two years to get there. We have to address it, but there is a rosier outlook now with campaigns and programs.”

In presenting the Second Interim Report plan, Reilly said the district will be able to meet financial commitments for the next two fiscal years, through 2017.

“The second interim suggests an overall improvement of the multi-year outlook,” Reilly said.

“This year’s second interim has a stable outlook,” said Superintendent Michelle King. She credited an increase in revenues from the More-than-a-Meal free meal campaign and improved student attendance, which alone increased revenues by $60 million.

King said that perfect attendance in the district could bring in an additional $250 million annually. King warned that there are 80,000 students who are chronically absent. But she said she is encouraged by the report and added, “Together, anything is possible.”

Board member Monica Garcia was happy to hear the district won’t have to send teachers pink slips, which has been standard practice over the past few years. “It is nice that California has increased support for our kids, and we need more and we could do better,” Garcia said.

King agreed. “We don’t want to get into the position of doing Draconian cuts.”

The LA Unified school board will consider major upgrades at school sites throughout the district at their regular meeting Tuesday.

The Facilities Services Division is asking the board to approve district bonds for projects including replacing a half-century-old canopy over a stairwell, replacing 60-year-old bleachers, upgrading walk-in freezers at 305 schools and replacing ovens, ice machines and refrigerators at 218 schools.

The Facilities Services Division is asking to approve $20.5 million to modernize walk-in freezers throughout the district. The plan would start the second quarter of this year and be completed by the fourth quarter of 2019, according to Facilities Chief Mark Hovatter.

The repairs will “focus on providing new panels, ceilings, floors, doors and new energy-efficient refrigeration and lighting systems” and will “improve student health, safety and educational quality,” Hovatter said. (See which schools are listed to get the walk-in freezer upgrades and their timeline in the Board Materials, search for “Tab 10.“)

The division is also asking for $1.85 million for a modernization program for kitchen equipment at schools districtwide. Those 218 schools will have the improvements made by the fourth quarter of 2016, if approved. (See the list of schools, what will be fixed and the timeline under Board Materials in Tab 11.)

Critical school repairs have to be done at 15 schools, so the division is asking for $18.6 million to schedule those. The money is available through the district’s bond program, which has $7.8 billion available.

The critical repairs include replacing roofs in four buildings that are more than 25 years old at Aragon Avenue Elementary School and a lunch shelter, and upgrades on 13 roofs more than 20 years old at Belvedere Middle School. Roofing repairs are also needed at Bethune Middle School, 10th Street Elementary, Chandler Learning Academy, Cohasset Street Elementary, Frost Middle, Hawaiian Avenue Elementary, Van Nuys Middle and Farmdale Elementary schools.

At Gulf Avenue Elementary School, a 50-year-old concrete canopy over a stairwell needs to be replaced, as well as deteriorated grandstand bleachers on the Hamilton High football field that are more than 60 years old.

Also on the list: fixing fire damage at Los Angeles Academy Middle School and air conditioning, heating and ventilation systems at Rogers Continuation High School and Stoney Point Continuation High School.

Four of the critical projects are in Richard Vladovic‘s and Scott Schmerelson’s districts (representing the furthest north and the furthest south in the nation’s second largest district). Three are in Monica Garcia’s district, two are in Monica Ratliff’s and one in George McKenna’s. None are in board president Steve Zimmer’s district. The cost and time schedule for each project is in the Board Materials (search Tab 9).

“We don’t really look at which districts, but more about where the greatest critical need is,” Hovatter said.

In other board actions scheduled for Tuesday at 1 p.m., the board will consider the Second Interim Financial Report which will outline current projections that the district may not be able to meet its financial obligations for the current fiscal year and for the two subsequent years. That report is to be given by Chief Financial Officer Megan Reilly.

The board will also hear staff recommendations for the denial of the charter petition for WISH Academy High School and the renewal of the charter for the Gifted Academy of Mathematics and Entrepreneurial Studies, which were delayed from the last meeting, as well as approval for material revision of KIPP Comienza Community Preparatory to expand to middle school and renewal of the CHIME Institute’s Schwarzenegger Community School.

The district will discuss restoring two stand-alone schools, Fourth Street School and Fourth Street Primary Center, and hold public hearings for new charter school petitions: KIPP Fuerza Academy, USC College Prep Blue Campus and USC College Prep Orange Campus.

School board meetings are open to the public. The earlier closed session starts at 10 a.m. and allows public hearing discussion beforehand, and the regular session begins at 1 p.m. at the school headquarters at 333 S. Beaudry Ave.

Melba Simpson conducted the audit

The latest independent audit of LA Unified shows that through the end of the last fiscal year, on June 30, the district had liabilities that surpassed assets by $4.2 billion.

The previous year showed assets over liabilities by $1.7 billion, making for a 12-month swing of $5.9 billion, according to Melba W. Simpson, of Simpson & Simpson Certified Public Accountants, the company that has done audits for the past seven years for LAUSD.

“For the first time the district has a negative net position,” Simpson told the school board’s budget committee this week. “The biggest change is that you are going in the red now.”

LA Unified’s Chief Financial Officer Megan Reilly said the big swing reflects new reporting standards put in place by the non-governmental Governmental Accounting Standards Board, which now requires the district to post pensions and longterm liabilities.

“We are having to front-load the $5.2 billion (in retiree pensions); that’s why we’re going into the red in one year,” Reilly said, explaining that the entire amount is being posted in the audit rather than in a footnote as had been done previously. In the past, there was a concern that pension obligations were not reflected properly in audits, Reilly said, adding “This change is happening in government and financial statements and put longterm and pension benefits on the books.”

The numbers will only get worse, because LAUSD’s other post-employment benefits, which are unfunded for the district, are estimated at $10.9 billion. The total is only expected to increase because of rising medical costs and longer life spans.

The district’s retirement health plan costs $800 million a year, and it was eventually going to put the district in the red, Simpson said, but the new pension accounting escalated the numbers.

The audit report was made at the Budget, Facilities and Audit Committee and four of the seven board members were in attendance. The audit is required by law for the district and cost $879,000, taking 10,000 hours to complete, Simpson said.

The audit includes depreciation on buildings owned by the district. That resulted in capital assets decreasing by $44.7 million. The district also had to repay nearly $580 million in bonds.

Board member Richard Vladovic pointed out that the capital depreciation is unfair because it doesn’t include the value of the land.

Confirming the reliability of the report, Reilly said “We have to have discussions about what the trends are saying and peel that onion back a little bit.”

Mónica Ratliff, who chairs the budget committee, said it is important to have an independent analysis of the district finances. She said she attended some of the superintendent search forum meetings and was surprised about the number of people who did not trust the district’s budget and thought money was being hidden.

“It is essential to be transparent with the public and have an independent auditor and see that everything is under standard procedure. I greatly appreciate that,” Ratliff said. “Now we need to see recommendations to handle our total liability.”

Megan Reilly weighs the pros and cons of going all-charter

Declaring that she has no intention of turning LA Unified into an all-charter school district, board member Mónica Ratliff chaired a board committee meeting yesterday that examined just what it is that makes charters different from traditional schools.

For one thing, as she learned from a presentation to the committee, charter school teachers don’t have to have to meet as rigid teaching credentials. They can pick their own textbooks, and they can choose their own disciplinary procedures.

As chair of the Budget, Facilities and Audit Committee, Ratliff insisted that neither she nor the committee members are seriously considering turning LAUSD into an all-charter district, but this was the second report in two months that assessed the advantages of charters over traditional schools. The presentation was made to clarify misunderstandings about charter schools along with what they can do that traditional schools can’t.

“This is an investigation for learning purposes,” she said. “We are not turning the district into an all-charter district.”

Rules for charter schools are determined by the state. Nonetheless, Ratliff said she was concerned with some of the dialogue about charter schools, that it seemed as if the district is “fighting with charter schools.” She said some charter school administrators are concerned that charter school proliferation will “destroy LA Unified, and that’s not appropriate, but people did stand up and say they are concerned about that.”

The district’s Chief Financial Officer Megan Reilly said that experts on a state level seemed nervous when her team was compiling answers for the committee. Changing the second largest school district into an all-charter district is unprecedented, and there are few examples or models of such a transition, so a lot of it was “like chasing unicorns,” Reilly said.

One of the advantages a large-sized district has is the power to buy books in bulk, Reilly said. The costs are higher for smaller charter schools that may buy from boutique printers when they pick their own curriculum. But, charter schools do not have to guarantee every child a textbook, as LA Unified does.

Devora Navera Reed, a district lawyer, told the committee that charter schools cannot waive federal or state laws, are not exempt from state testing or state education requirements and must run criminal background checks for staff.

Class size limits are not required in charter schools, and schools are not required to cater only to students in their neighborhoods.

The biggest flexibility that charter schools have is in staffing, tenure and layoffs, unless they have a collective bargaining agreement, Reed said. Charter schools do not have to have collective bargaining.

“If you have younger employees coming in, those are cheaper costs,” Reilly noted. “Salaries are always the largest cost.”

LAUSD requires principals to have at least five years of teaching experience, which isn’t the case for charters. College prep courses and English Learner certificates are also required by traditional schools at LA Unified but not by charter schools.

Charter schools can set their own calendar and bell schedules as long as they meet the daily and annual state requirements. LAUSD requires 180 days of school instruction, but a charter school year can be only 175 days.

One of the biggest problems for charter schools is paying for rental property for classrooms, Reilly said, bringing up additional costs for the schools.

“The analysis we have been doing is in light of the Broad charter plan,” Reilly said, a reference to Great Public Schools Now. “We have community partners that have been approached, but they have also asked us for our feedback as well. That is part of the dialogue going on for the last several months.”

Reilly said the special education expenses by LAUSD is far more than required, and results in a rate of spending 7.6-to-1 compared with charters. Traditional schools spend $9,888 per student with disabilities while charter schools spend $1,291 per student with disabilities, according to Reilly.

“This is significant, the costs are not the same for charter schools,” Ratliff said “We need to work together and talk about it.”

Board member Richard Vladovic said that even if the district were to be broken up into smaller districts, the schools would have to handle the burden of retired teachers and other debts that would make it impossible for the schools.

School board member Richard Vladovic

A major contributor to LA Unified’s pending fiscal crisis is unfunded federal and state mandates that have deprived the district of hundreds of millions of dollars in recent years.

The exact number is difficult to calculate because the total not only reflects the amount the district seeks in reimbursement but what percentage the governments return to the district. In some cases, it’s little more than 20 cents on the dollar.

“It’s all very, very complicated,” said school board member Richard Vladovic, who brought the issue to light last week during a budget committee meeting. “The state controls everything; they impose the mandate and we have the responsibility to fulfill them. And the federal government does the same thing.”

The reluctance of the state and federal governments to send dollars into the district and the ever-falling reimbursements rates is nothing new for LA Unified.

But the need for those missing dollars has become more urgent with budget deficits projected within a few years as the number of enrolled students declines and district expenses rise.

A recent report from an independent panel brought in by Superintendent Ramon Cortines warned the school board that under current trends, the district faces a deficit of $333 million in 2017-2018, $450 million in 2018-2019 and $600 million by 2019-2020. And those numbers would erode the district’s credit worthiness, driving the deficits up even higher.

Vladovic suggested that just by meeting its legal obligation on supporting special education, the federal government would ease the district’s financial struggles by $800 million.

“It’s so unfair,” he said. “They only reimburse us at something like 11 percent and law says it should be closer to 40 percent.”

At the budget committee meeting, the district’s Chief Financial Officer, Megan Reilly, told the board the state owed the district more than $200 million.

Vladovic turned to the camera live-streaming the meeting: “They haven’t paid us, for those of you watching, the state owes us that much more money, and I’ll get off this soap box, they owe us more and [we have] more requirements and they do not follow the law and yet we have to follow the law every bit. We can certainly use that $200 million, trust me.”

Reilly’s deputy, John Walsh, told LA School Report that his office is investigating an estimated $227 million owed by the state as well as money owed by the federal government. He pointed out that the independent financial report urges the district to press Washington for full funding for the students with special needs.

The district’s lobbyists have warned that a plan now in the House of Representatives could cost LA Unified $78.7 million of its Title I money for low income schools, which translates to 22.9 percent of its funding.

The district’s looming deficits could also be affected by the future of Prop 30, a ballot initiative approved by state voters in 2012 that raised income taxes on wealthy individuals for seven years and increased state sales taxes for four years. Much of the money has been going to support public education.

The prospect of extending those revenue streams is now in the hands of two groups that want to get a new initiative on the ballot next year. By one estimate, passage would generation as much as $9 billion a year for another 15 years.

Mike Szymanski contributed reporting to this story.

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Megan Reilly

It’s one thing when LA Unified’s Chief Financial Officer appears before the school board and warns of budgetary troubles ahead, based on current projections and obligations. That’s her job.

It’s quite another when a panel of outsiders, brought in to take a fresh look, reaches the same conclusions and expresses them in a hair-raising way that promises existential consequences if immediate change is not forthcoming.

The “Report of the Independent Financial Review Panel,” the work of nine experts called in by Superintendent Ramon Cortines, is the ultimate wake-up call for a district driving dangerously to the edge. In its essence, they say current trends are unsustainable and will lead to the end of LA Unified as configured if bold steps aren’t taken to accommodate realities that have been so far unaddressed with meaningful response.

“If the District desires to continue as a growing concern beyond FY 2019-20, capable of improving the lives of students and their families, then a combination of difficult, substantial and immediate decisions will be required,” it says. “Failure to do so could lead to the insolvency of the LAUSD, and the loss of local governance authority that comes from state takeover.”

The panel is scheduled to present its findings to the board at tomorrow’s board meeting. The overall message echoes what Megan Reilly, the district CFO, has been saying all along, that despite an improving economy, budget deficits are just a few years away.

But the 75-page report conveys an urgency that Reilly’s warnings have lacked. After all, Cortines created the panel six months ago, which means another half-year has passed without substantial changes from the board and superintendent, leaving financial threats to build.

While the panel makes clear a need for fundamental changes in how the district conducts business — from its relationships with unions to how it pays for cafeteria food — it cites as the root of looming insolvency a steady decline in enrollment, the causes of which the district has only limited control. The major factors are the growing popularity of charter schools, an outward migration of families from Los Angeles and a declining birthrate among city residents.

No real news there, but what is news is the urgency with which the panel implores the board to start recognizing the trends for the impact they’re having on the district and to respond accordingly.

For example, the report concludes that despite the loss of about 100,000 students over the last six years, representing a revenue loss of nearly $900 million, “the district had not reduced staff commensurate with the loss of enrollment and, in fact, had experienced higher salary costs because of both salary and benefit increases and increases in staff.”

The report recommends “even broader future changes”  beyond cutting the workforce. “At some point,” the authors conclude, “the number of schools will also need to be examined as the District ‘right sizes’ itself.”

This is hardly a description of a healthy, vibrant, growing district. And even if a majority of board members agree that it’s time to act on the panel’s four dozen recommendations to stave off insolvency, other outside forces will make the challenge even more difficult.

First, there is the escalating growth of charter schools within the district, with hundreds more to come if the Broad Foundation makes good on its plan to to serve half the district’s student population in charters within the next eight years. Currently, about 15 percent of district students attend charters. Independent charters siphon money away from district control.

Second, there are the continuing efforts by the district’s labor partners to increase the number of jobs and at least maintain the current level of benefits, which the report says are almost 10 percent higher than the statewide average. For months now, the teachers union, UTLA, has been warning its members that the district will try to reduce benefits during the next contract negotiating period. Counter-measures by the teachers to fight any givebacks are now underway.

Finally, the district is facing the possibility of declining revenue from the state, a result of temporary taxes scheduled to sunset between 2016 and 2018.

Well-funded charters, determined labor unions, uncertain state tax policies — these are formidable challenges for a district that has largely ignored the structural issues putting it in jeopardy.

The CFO has done her job. Now a panel of outside experts has weighed in. What happens next depends on the seven members of the elected school board, who are also trying to find themselves a new superintendent by Dec. 31. 

What an unpleasant gift they are waiting to present.

That’s the overall conclusion of a report by an outside panel asked to look at the financial situation of LAUSD. Its findings are scheduled to be presented at the regular school board meeting Tuesday. The Report of the Independent Financial Review Panel also contains strong recommendations that involve cutting staff, curtailing health benefits and finding strategies to keep more children in school.

If the district wants to survive beyond 2020, the panel said “a combination of difficult, substantial and immediate decisions will be required. Failure to do so could lead to the insolvency of the LAUSD, and the loss of local governance authority that comes from state takeover.”

The panel concluded, “This outcome would represent a total failure of the educational system for the state and for our local community and is therefore unacceptable. Our recommendations are intended to prevent the district from moving closer to the brink.”

This report represents a collaboration of professors, politicians, business leaders and education experts, appointed by district superintendent Ramon Cortines six months ago. The group confirmed a lot of what the district already knew: that LAUSD will face a budget deficit of $333 million in the 2017-2018 school year, $450 million the next year and $600 million in 2019-20 — all driven primarily by a declining enrollment and increases in pension and healthcare costs.

The report, obtained by LA School Report, said, “This expanding gap represents a serious challenge to the LAUSD’s financial stability in the near term, one that insists upon immediate action today.”

Some of those actions describe how much money could be saved by taking specific actions:

• Upwards of $400 million by offering early retirement to senior level staff.
• $100 million by negotiating a cap on district health care.
• $57 million by shifting 10 percent of the cost of health care benefits to employees.
• $45 million by increasing attendance rates to the statewide average.
• $50 million eliminating general fund contributions for Food Services.
• $10 million by eliminating the Teacher Pool, where displaced teachers are used as substitutes and paid a higher rate.

The panel doesn’t blame the district in any way and notes that Chief Financial Officer Megan Reilly reached similar conclusions. She said in a statement today that the findings “reflect the budget realities we face and the need to create long-term financial strategies. I am extremely proud of this work and the amazing leadership of our board and superintendent to have these important conversations boldly and in public.”

Reilly added, “Let me be very clear, I supported and continue to support access to more programs for our students, adequate funding for all students, including special-education programs and better wages for our employees”

The panel also recommended that the district consider pushing for passage of a parcel tax. The membrs found that compared with other states, California has a portion of school funding provided by state income and sales tax that is much higher than other states but the role of local property tax is much lower.

The report finds that the per-student funding level for LAUSD, the second largest district in the nation, is about $12,691. The nation’s largest school district, New York City Public Schools, provides nearly double, $23,690. In fact, LAUSD’s revenues fall $1,659 per student below the average revenue amount for the top 10 districts in the country. If LAUSD received this funding, total funding would be about $800 million more per year, the panel said.

“It is clear that the effect of California’s ranking near the bottom of the nation in per-student funding has taken its toll on LAUSD finances,” the members wrote.

One of the biggest reasons that district is suffering financial losses is the decline of enrollment. In six years, LAUSD has lost almost 100,000 students and now serves about 550,000 students. About half of the loss of students is because of enrollments in charter schools, but about half of the students are simply because of low birth rates as well as students dropping out of school or transferring to other school districts. This, of course, is all before the start of a Broad Foundation plan to move half the district’s students into charter schools within the next eight years.

The panel did find that even though the number of students went down, the district’s employment rolls have increased, to 64,348 in the current year from 64,116 in 2013, and said that “these staffing levels need to be reexamined.”

Among some of the specifics in the report, the panel found that if even the teaching staff had a better attendance rate, improving from the current 75 percent to a 90 percent, it could save the district $15 million a year in costs for substitutes.

The district could also save money by looking at using the Federal Affordable Care Act as the standard for retirees or consider going to a 90/10 contribution rate health benefit plan that could save $57 million.

In response to the panel’s work, Cortines said in a statement,  “The panel has provided a detailed report that outlines a framework to address the substantial long-term challenges we face as a district.”

He said he wanted the district to “hold up a mirror and ask outside experts to come in and fully review our financial situation.” Because Cortines plans to leave by the end of the year, he said, “This report comes at an important time, and I hope it will give the new superintendent a starting point for the important discussions that will take place in our district. If I were the incoming superintendent, this is exactly the type of report I would want to see.”

Former state treasurer Bill Lockyer on panel to advise LAUSD.

* UPDATED

A blue-ribbon panel of leading figures in education, politics and finance has been working behind the scenes to help LA Unified identify financial challenges and solutions as the district faces budget deficits in the near future.

The panel includes people who have worked with the district in the past, and many have won awards or honors for their involvement in education. One member is now working for the search firm hired to find the district’s next superintendent.

Known as the Independent Financial Review Panel, the group was formed in March by Superintendent Ramon Cortines and is being supported by $250,000, approved by the board. The panel’s findings and recommendations are due before the end of the current academic year. Cortines has expressed his desire to step down by the end of the calendar year.

The money to support the examination was approved in June, but no one is being paid, said a district spokesperson, adding, “We will be buying them sandwiches.”

Despite the constant refrain by board members to bring transparency and accountability to the business of the district, the work of the panel is being conducted in private. The members of the panel were not identified publicly (see below), and meetings are not open to the public. The panel was mentioned almost as an afterthought in a report earlier this week before the Budget, Facilities and Audit Committee by Chief Financial Office Megan Reilly, whose office is overseeing the panel’s work.

In her presentation, Reilly said it is an “all-volunteer” panel that will take “a comprehensive deep dive and look at the financial problems facing the district.” She said they were “outside experts asked to join us on behalf of Mr. Cortines.”

Reilly has projected a budget shortfall of $333 million in 2017-18, presumably one of the reason the group was impaneled.

During the public forum section of the committee meeting, led by board member Mónica Ratliff, a former school board member, David Tokofsky, pointed to the secrecy surrounding the panel and its work.

“This is the first time in a public meeting that this financial review panel has ever been mentioned,” he said.

Late today, the district provided a package of information, reflecting the material the panel has been examining over its first four meetings, with two to go. The subjects reviewed include a history of the district finances, the evolution and mechanics of the Local Control Funding Formula, reviews of state and federal education funding, district budget schedules, personnel costs, and debt, tax and bond information.

Some of the material has been reviewed at previous board meetings, but taken as a package — all 260 pages of it — it’s the kind of material any panel of this kind would need to make informed recommendations for a district with an annual budget $7 billion, excluding federal dollars.

According to Reilly, Cortines asked her in March to establish a group of experts in California public finance and education. The panel convened that month to “help review and make recommendations concerning the long-term financial sustainability and health of the district,” according to a slide she presented at the committee meeting. She added, “Their work is intended to provide a foundation for our discussions regarding the district’s long-term priorities and investments.”

This is the first time such a high-profile panel of outside experts have been asked to look at LAUSD’s budget and other financial material.

According to another statement, the panel is “expected to review and make recommendations concerning long-term financial matters, financial priorities and the health of the district’s finances.” The report says the panel “will not be involved in the development of current budget plans or discussions with the district’s collective bargaining units.”

These are the members of the panel:

• Maria Anguiano, an architect of the University of California-wide fiscal improvements plan and a former senior advisor to the Bill and Melinda Gates Foundation Post-Secondary Success Team.
• Delaine Eastin, the 25th California State Superintendent of Public Instruction and the first woman to be elected to that position.
• Michael Fine, chief administrator for Fiscal Crisis and Management Assistance Team.
• Bill Lockyer, former California Treasurer and veteran politician.
• Darline Robles, the former superintendent of Los Angeles County Office of Education and the Salt Lake City School District who is now part of the search firm seeking the next LAUSD superintendent.
• Miguel Santana, former city administrative officer for Los Angeles Antonio Villaraigosa and deal with a time of severe belt-tightening for the city.
• Darrell Steinberg, longtime state politician and president pro tem of the Senate who authored more than 70 bills involving education, mental health and foster care.
• Peter Taylor, president of ECMC Foundation, chaired the James Irvine Foundation and is on the boards of the Kaiser Family Foundation and the J. Paul Getty Trust.
• Kent Wong, the director of the UCLA Labor Center, and former staff attorney for the Service Employees International Union.
  

  ---

  *Adds informational about the panel’s activities and updates background of Michael Fine.

Among those joining in on the road trip are Chief Deputy Superintendent Michelle King, Chief Financial Officer Megan Reilly and board members George McKenna and Steve Zimmer. They planned to meet with Senate President Pro Tem Kevin de León and “other key legislators,” according to district officials.

Superintendent Ramon Cortines announced plans to eliminate funding for a pre-school program serving about 13,000 four-year olds, called the School Readiness and Language Development Program. SRLDP costs about $26 million annually and is the only pre-school program financed exclusively with district general funds.

As a result, the board approved a resolution to explore the idea of expanding existing transitional kindergarten programs, which are partially paid for with state funding.

Adult education programs were among the first to be slashed throughout the the recession years, and it has yet to benefit from recent state revenue increases. Further, more cuts are planned. The district issued layoff notices to hundreds of adult education teachers in April.

The latest budget projections from the state’s legislative analysts office estimate the district will receive $710 million dollars above what it had initially expected.

Why has it taken so long?

For one reason, says the district, parents of many gifted students proved they, too, are gifted — at cheating. For another, the new student tracking system known as MISIS showed yet again how it could bollix up a program to the detriment of students, teachers and schools.

By next month the GATE staff of 19 is expected to complete its review of 5,622 students who had been identified as possible candidates for the program in 2013-2014, in addition to any new referrals from the current school year. Overall, about 70,000 students are enrolled in the program.

“We’re almost all caught up,” said Megan Reilly, Chief Financial Officer, fully relieved now that Superintendent Ramon Cortines has allocated $35,000 for Saturday assessments to help alleviate the bottleneck.

The logjam began in the 2012-2013 school year after Wynne Wong-Cheng, a district GATE specialist, said her department noticed irregular patterns in the results of the district’s most widely-used and efficient test for gifted students called the “Raven’s Progressive Matrices,” which measures intelligence by assessing how a child learns.

She found that the district had many gifted students. Maybe too many.

“When you start seeing an entire classroom above the 99th percentile, or when you’re looking at statistics, and it’s not being aligned with what we’re supposed to be finding, then we have to look deeper,” she told LA School Report.

That deeper look was not good.

“The group assessment we were using over the past 14 years was being compromised,” she said, choosing her words carefully, before adding, “What we were finding was that a lot of the kids were pre-exposed to the assessments.”

Pre-exposed, as in searching for the test online, as in cheating.

“Not by the schools,” she was quick to clarify, but by internet-savvy parents, hoping their children tested well enough for their school’s more rigorous GATE instruction or viewing it as a ticket into some of the district’s most elite academic magnet schools.

“We’ve had a lot kids that would just admit that they were on the web taking the actual test the night before with their parents,” Wong-Cheng said.

Apparently, it doesn’t require much skill to find the Raven test online. “All you have to do is Google the name, and it comes up,” she said.

When the district became aware of the problem, the GATE department began reviewing earlier Raven testing records, sometimes reassessing an entire school, sometimes re-testing individual students. “That was one of the biggest reasons this problem started,” Wong-Cheng said.

GATE officials also decided to discontinue the Raven, phasing it out over the last three years, exacerbating the unprecedented setback. This is the first year the district did not use the old test at all, instead, piloting a new, unnamed, group assessment.

However, in the absence of the group test, the GATE staff was limited to screening students one-on-one, an extremely labor intensive process, according to Wong-Cheng. While the Raven takes 45 minutes to administer to 25 to 30 children at one time, individual assessments by a GATE psychologist can take up to two hours, and the district only employs eight full-time psychologists.

LA Unified officials also contacted Pearson Publishing, the maker of the test, to get the company to pursue legal action against online posters. But, it proved to be prohibitively expensive and ultimately, as anyone with an unflattering picture on the internet can attest, impossible to eradicate from the web.

The Raven test is considered by many field experts to be the gold-standard for IQ assessments and is still widely used by school districts throughout California, including San Diego Unified, the second largest district in the state. Developed in 1935 by John Raven, it is a non-verbal test designed to measure a student’s intelligence and cognitive processing rather than achievement levels, ability to memorize facts or the possession of a broad vocabulary.

Despite its widespread use, it is just one of a handful of assessments administered by LA Unified, which has seven categories of gifted and talented identification: Intellectual, tested with an IQ assessment administered by a psychologist, including the Raven; High Achievement, also IQ based; Specific Academic Ability, based on academic records including standardized test scores and class grades over two to three years; Leadership Ability, usually based on teacher referrals; Creative and Visual Arts, requiring a portfolio of work; and Performing Arts, which usually involves an audition.

Another factor contributing to the backlog was the introduction of MISIS. In recent years, the GATE office has generated lists of eligible gifted and talented candidates by data mining, using a computer program to cull through online grade records and standardized test scores. The system was set up as a result of an investigation by the Office of Civil Rights, which concluded that fewer Latino and African American students were recommended for screening than their white peers. The district automated the process to eliminate human bias.

But for most of the year teachers have been unable to use MISIS to record student grades. And it wasn’t until the beginning of this month that the automated program was fixed. A MISIS update dated March 4 announced, “GATE Identification has been corrected and is reflecting accurately.”

Erin Yoshida-Ehrmann, a GATE district specialist, said the grade vacuum coupled with the absence of standardized test scores as the state transitions to the Common Core, created an over-zealousness in teachers, who “upped student referrals” for the “Intellectual” and “High Achievement” categories, when they realized the automated system was down.

“Since the discontinuation of the [standardized tests] we came up with a contingency plan where our students would use their grades, in addition to their previous California State Test scores,” Yoshida-Ehrmann explained. “But with MISIS” and the uncertainty of no test scores, “I think a lot of the schools decided to up their referrals for the Intellectual because they were afraid that it was going to impact their identification percentage.”

Schools that under-identify eligible GATE candidates are monitored by the district.

“Teachers were afraid of having kids fall through the cracks,” she said.

Overall enrollment in the GATE program has grown steadily in recent years, even as district enrollment has experienced a sharp decline.

LAUSD CFO Megan Reilly

It turns out LA Unified’s money woes aren’t so bad — for now, anyway.

Shortly before the end of the calendar year, Superintendent Ramon Cortines and other district officials were forecasting a deficit of $320 million, sometimes closer to $350 million. But that was before Governor Jerry Brown proposed his new budget.

Now, the district’s revised estimated shortfall is a quarter of the original — about $88 million.

Megan Reilly, Chief Financial Officer for the district, told school board members yesterday much of the difference is being made up by an increase of $240 million in Local Control Funding Formula (LCFF) revenue, which aims to return district funding to 2007-08 levels.

“LCFF makes up 76 percent of our total general fund,” she said.

That means per pupil funding next year will go up to $9,322 from $8,403 this year. Still, that falls far below the goal of just over $11,000 per student. And it leaves the district 18 percent shy of the overall budget target.

“And remember, having a target or meeting the target is not the same thing as having adequacy,” Reilly said.

Another windfall for the district next year is a one-time mandated cost reimbursement of $93.4 million. Reilly described it as a debt from the state for ”things that the governor or the legislature mandates the district to do but did not provide funding.”

The bad news for the district, however, is declining enrollment and attendance.

On average the LA Unified enrollment goes down by 3 percent each year due to a lower birth rate and attrition to charter schools. And every 3 percent loss of students, Reilly said, costs the district $100 million in funding.

But making matters worse this year is MISIS. The glitchy student data tracking system did not have the capacity to track attendance for several months early in the school year, forcing teachers to take attendance by hand, then go back and re-enter the information into the system. Unfortunately, the data often vanished from the program.

The implications of the district’s software problems could be disastrous when it comes time to report attendance data to the state because the state relies on self-reported data to calculate average daily attendance funding. The loss of information could cost the district several hundred million dollars.

“We’re trying to recapture as much of that data as possible,” Cortines said, attempting to soothe the board.

But board members took little comfort after hearing from Reilly on the subject.

“I will have to say right now we’re looking at variances of 3 percent up to 16 percent in these numbers,” she said. “We are talking about a drop in revenue in the hundreds of millions of dollars.”

That lead to an audible gasp in the board room auditorium.

Alex Caputo Pearl, president of the teachers union, UTLA, chose to seize on the positive state budget news to encourage the board to support a long-awaited salary increase for teachers. The union and the district have been negotiating a new contract for months, with little progress reported.

“We see a lot of opportunity to get down to business to talk about salary that will actually recruit and retain educators in LAUSD and some of our hardest hit schools in the nations,” he told the board.

The boon is also an opportunity to implement lower class size throughout the district, he added.

By UTLA’s calculations Reilly is low-balling how much LA Unified is likely to receive in state funding. “We’ve seen an 8.7 percent increase in K-12 funding. That could be up to 12 percent increase, from what we understand, for LAUSD,” Caputo-Pearl said.

Furthermore, he added, “those percentages are likely to be floors rather than ceilings given that we’ve got a democratically controlled legislature.”

Ramon Cortines at Tuesday’s LA Unified school board meeting

The LA Unified school board got a first look at the district’s financial future, and what members saw wasn’t pretty. Yet, it wasn’t ugly enough to stop the board from approving millions of dollars in new expenditures.

Like a town crier, Superintendent Ramon Cortines has been warning anyone willing to listen that the district is on the verge of a $300 million deficit by the 2015-16 school year. But during the eight-hour meeting yesterday, district Chief Financial Officer Megan Reilly reported it’s getting even more bleak:  “We’re facing a $784.5 million deficit by 2016-17,” she told the board.

A large portion of the first shortfall — $81 million —  is due to the expiration of the state’s Quality Education Investment Act (QEIA) grants at the end of the year. The program has helped some of the district’s lowest performing schools shrink class size and hire additional teaching staff as a way to raise test scores. Although some schools are eligible to carry over a portion of this year’s cash into next, providing a temporary bandaid, Cortines said it’s hopeless to attempt to persuade the state to keep the tap open.

“That’s the reason I caution you about additional spending,” Cortines told the board. “Because we will just have to deal with that, and it means that I’m going to have to cut, consolidate or eliminate programs.”

Other factors according to Reilly: Exponential mounting contributions to employee pension funds are hurtling the district deeper into negative territory; higher than expected state revenues this year are leading to a 10 percent decrease in additional Local Control Funding Formula resources for next year.

But the biggest wallop to future budgets comes from the district’s declining enrollment problem. Reilly says the district has been steadily losing about 15,000 students a year, about 3 percent of the current total enrollment.

“When that happens the estimated drop in revenue is about $100 million,” she said, adding that the downward slide is expected to last another two years.

The loss of students and the federal dollars that go along with them is due to a combination of lower birthrates and the exodus of students from traditional public schools to the district’s 250 charter schools.

Ironically, the sobering discussion on the financial threat charter schools present to the district was preceded by approvals for 14 of 15 charter schools, a typical rate for a board meeting. The seven members routinely green-light most of the charter applications and renewals that come before them.

The contradiction was not lost on board member Bennett Kayser, whose animus toward charter schools came into full view when he asked, “Why are we losing money? Because of birthrates and charter schools. How many charters did we authorize today? They’re taking away significant revenues to fund small charter systems or to fund corporate systems who are out for money and real estate instead of helping kids.”

Steve Zimmer waited to air his frustrations before a vote that ultimately approved another charter for the highly successful KIPP chain of charters.

“Given KIPP’s external funding contributions it is very, very, very hard for us to compete. We can’t compete,” he said.

George McKenna suggested one way to compete would be for the district to bring in professional fundraisers to tap wealthy Los Angeles residents to pitch in and help.

“We’re being eaten alive,” he said.

The hand-wringing over declining revenue did not stop the board from approving two big ticket items, more money for the student data tracking system known as MiSiS and for wireless devices.

Without much discussion, the board unanimously consented to spend another $13 million in bond construction funds to buy testing devices for the Smarter Balanced Assessment in the spring. The plan is to combine this sum with another $9.2 million left over from last year’s round of purchases, to buy approximately 29,000 iPads and Chromebooks. The devices are scheduled for delivery in February.

Similarly, not a single board member raised a question about Cortines’s request for $12.1 million to carry the plagued MiSiS software through the end of January, accepting that the “approval of the proposed action will provide additional funding needed for efforts to stabilize MiSiS.”

It was a stark contrast from previous demonstrations by school board members of disbelief, disgust, and almost apoplectic shock at the student data system’s colossal failure expressed in recent months.

Even Cortines’s statement, “I still believe it will take a year to resolve the issues with MiSiS,” failed to get a rise out of any of the board members. Though, perhaps they were assuaged when he added, “We are beginning to see evidence the system is stabilizing.”

The additional spending on MiSiS puts the total tab at $45.5 million to date. Matt Hill, who has overseen the implementation of MiSiS from the start, said that could go up to $86 million by the end of the year.

There were some areas where the board showed some restraint: A resolution that would have committed $3.5 million to “Promote Healthy Relationships and Prevent Teen Dating Violence” passed but was stripped of funding.

The same tactic was taken with Ratliff’s resolution aimed at increasing school safety by boosting staffing levels. While it started out calling for the district to staff every classroom with at least two adults, that part was gutted from the final version that was approved.

By the current formula, which calculates how much money goes to districts based on student attendance, about $292.4 million will no longer flow to LA Unified’s public schools in the 2014-15 school year.

At a special school board meeting today, during which the board members discussed the district budget for this year and next under California’s new Local Control Funding Formula, Megan Reilly, Chief Financial Officer for LA Unified, said district projections indicate the enrollment problem is only going to get worse.

In the 2015-16 school year the district expects to lose another 2.9 percent of non-charter students, bringing that group’s enrollment down by 72,000 students over two years. It would make it the 12th straight year of enrollment decline.

Reilly attributes the steady loss of students to the increasing popularity of charter schools. “About 44 percent of the movement has been to charters,” she told school board members.

But the majority of the decline is due to demographic changes as Southern California birthrates decline, and people are moving out of the area.

As a result, Reilly warned board members to “pay special attention to the district’s fixed costs which don’t change when enrollment declines.”

“They can start taking up more of your budget,” she said.

That’s especially true when it comes to paying out pensions and health benefits for retirees which continue to grow.

Board member Steve Zimmer tried to provide a ray of sunshine on the gloomy news.

“You’re basing these figures on charter enrollment that we’ve already approved,” he said, perhaps suggesting that the school board may want consider restricting charter application approvals, something the board has been accused of not doing.

Although he acknowledged “we have work to do in terms of children being born,” Zimmer suggested the board could devise strategies to boost enrollment and retain more area students.

Board member Marguerite LaMotte: ‘We’re as angry as you are.’

One parent wanted more counselors. Another wanted more security personnel. A student came forward with a friend and said, “You’re spending all that money on iPads. We’d prefer you spend it on nurses and librarians and can you please fix the bathrooms.”

This was Tuesday night, in the auditorium of Burroughs Middle School in Hancock Park. Parents, students and teachers took their concerns to a microphone, suggesting ways to slice up a $7 billion budget that includes $230 million in new revenue from Prop 30 taxes. District officials and three LA Unified Board members were there to listen.

It was democracy in action, ordinary citizens speaking to power, as part of Gov. Jerry Brown’s Local Control Funding Formula plan for getting districts more money. But it was sad, too, as everybody seemed to know there is only so much a district can do and so many demands for so many needs.

“A lot of anger, a lot of frustration, the reality of six years of non-stop keeping schools open and everything running with fewer and fewer resources,” Megan Reilly, the district’s chief financial officer, said in an interview yesterday.

Reilly had presided over the 90-minute gathering, the fifth of six such community meetings held this month, the last at Dymally High School in south Los Angeles last night. The district also held a session for union officials. The overall purpose was to gather feedback for when the board gets around to drawing up a spending plan for the 2014-2015 academic year.

Reilly said she and colleagues who have attended the meetings have heard different concerns at different sites, but all laced with the common denominator of pent up frustrations over years of budget cutbacks.

“The feedback has been so raw, but so heartfelt,” she said. “It’s very impactful stuff.”

The pleas also come at a time the district is fending off slings and arrows from critics of the iPad rollout, an imperfect exercise so far that could cost the district as much as $1 billion if it continues through completion. Just this week, the rollout schedule was stretched out a year, to the end of 2015, in deference to the problems so far.

Never mind that iPad money is separate from Local Control money.

Still, a billion dollars for tablets that lots of people don’t necessarily want has been a bitter pill to swallow for many, with remedies still needed for overcrowded classrooms, the union cry for more teachers and insufficient supplies of toilet paper.

With needs different place to place, a consensus seems to be building around the district for letting schools make their own spending decisions, rather than LA Unified Central. In the very unscientific poll Reilly conducted Tuesday night, 72 percent of the 86 people voting “agreed” or “strongly agreed” with the proposition that schools should get more autonomy over how to invest their money. That’s something else the board has to decide.

The three board members in the audience Tuesday night — Monica Ratliff, Steve Zimmer and Marguerite LaMotte – each took a turn at the end, addressing those who stayed. We hear you, they all said, acknowledging the grim landscape and promising that things, even if slowly, will start improving.

“We’re as angry as you are,” LaMotte said in a rousing closing argument, her fist pumping the air.

It’s true, in a way, that things can only get better. One of the slides Reilly put up early in the presentation showed the decline of per-student spending by state since 2008, when the recession hit.

California ranked 49th, trailing only Alabama.

Previous Posts:You Name It, LA Unified Community Wants it Funded; Vladovic Willing to Meet with Groups on Spending Plan*; Local Groups to LA Unified Board: Let Schools Decide Spending

A combination of declining enrollment, federal cuts in special education and this year’s Federal sequestration has put a big pinch on big plans. While the district managed to close a $450 million budget gap for the current fiscal year, thanks in part to one-time funds from the state, it faces a $350 million deficit in 2014-15.

If the board didn’t understand that before yesterday, it seems crystal clear now.

Months ago the members directed Superintendent John Deasy to devise a spending plan that included a laundry list of wants, needs and programs, including rehiring employees laid off during the recession and bringing back student-to-teacher and student-to-counselor ratios to 2007 levels.

The presentation Deasy and LAUSD Chief Operating Officer Megan Reilly made to the board brought the fiscal reality into the open, leaving the unmistakable message: We can’t afford what you want.

Several members bristled when Deasy ticked off the costs of various items the board wanted to fund, including $207 million for new teachers, $68.8 million for psychiatric social workers, $300 million for extending to the school year 20 days. The total bill, including the cost of closing the deficit: as much as $1.4 billion.

“What are the prospects of us getting a billion dollars,” Monica Ratliff asked Reilly.

“Not at all,” she said.

Board member Steve Zimmer seemed to find the presentation incomplete, lacking a grand vision to move the district toward long-term fiscal stability.

“We asked for a three-year plan of what it might look like,” board member Steve Zimmer said. “This isn’t a design. This is only what the costs are.”

He asked Deasy to provide “a trajectory” for the future, a request echoed by Board President Richard Vladovic, who said, “I prefer a strategy that we can move toward over the next five to 10 years.”

Deasy’s presentation did include a three-year plan, of sorts, his own spending recommendations for the next three years, which included pay raises for current LA Unified employees and allowing school sites to make their own spending decisions, a contentious issue.

Local input has emerged as a major concern in the budget debate, and it’s now clear that no vote on spending will take place until a series of public meetings are complete. Deasy’s proposal listed five that have been scheduled with community groups, and a sixth is on the books to give the district’s unions the opportunity to contribute ideas.

In drawing the meeting to a close, Vladovic, who has been criticized by community groups for not engaging them more aggressively, said, “I encourage parents out there to attend one of these meetings.”

Public comment will likely weigh heavily on one of the major points of contention in the battle over spending priorities. Zimmer and others on the board want to rehire personnel, with the idea that to solve the long-term problem of declining enrollment — 3 to 3.5 percent a year, about half the number students leaving district schools for independent charters — it must bring back more teachers, counselors and librarians.

That debate, begun in June, will continue into November, when the board has a meeting scheduled to discuss spending priorities and, presumably, a “trajectory.”

In the meantime, the first public meeting will be held Oct. 8 at Daniel Pearl Magnet HIgh School in Reseda.

Previous posts: Local Groups to LA Unified Board: Let Schools Decide Spending; LA Unified Budget Wars Return with the Usual Competing Visions; Deasy’s D.C. Trip Yields ‘Less than Positive News’ on Federal Budget; Common Core Budget Approval Put Off for Another Week; School Board Meeting Wrap Up: More Discussion Than Votes*