Lesson in Bankruptcy

City schools flunk fiscal test, pray for help

By Craig Powell
May 2019

Nothing is more important to Sacramento and its future than the education of our children. If Sacramento City Unified School District is in crisis, our city is in crisis.

We cannot attract or retain high-paying jobs and growing businesses if our schools are in shambles. And if we fail to prepare our young people to compete in a competitive world, we consign them to substandard lives and eclipsed prospects. Most residents are aware that Sac City Unified produces kids who are comparatively poor performers on California standardized tests. What many people may not realize is that a fiscal crisis at the school district is about to kneecap the already compromised futures of our children.

A possible state takeover of the school district this November will do severe harm to public education in Sacramento. The harm will reverberate for decades.

If the crisis is not averted by dramatic financial reforms, two things will occur. First, the state will make an emergency loan to Sac City Unified. Second, the Sacramento County Office of Education will appoint a receiver with dictatorial powers over city schools. The receiver will have one directive: slash spending, programs, jobs, salaries, benefits, budgets, facilities and school sites to repay the emergency loan, with interest, as fast as possible.

Based on the experiences of nine California school districts taken into state receivership in recent decades, we should expect the process to last about 10 years. Good luck hiring or retaining quality teachers while the district is in the hands of a receiver bent on slashing spending.

Local input into how city schools operate will be effectively nil. And the stigma of being a failed school district will likely linger for years after receivership ends, which may impact the district’s ability to attract teachers and students, and secure bond financing.

The flight of students to private schools, charters and suburban districts will accelerate and drain city schools of state revenue based on average daily attendance. Sac City Unified has suffered declining enrollment for years. Those declines will become a tidal wave.

This unprecedented crisis screams out for intervention by Sacramento’s civic, political, business, labor and religious leaders, and—most importantly—the public. Presently, our leaders are snoozing.

How Bad Is It?

The state Department of Education sent a Fiscal Crisis and Management Assistance Team to review the district’s financial condition. The team found past mismanagement, communication failures, inexperienced staff unable to maintain and analyze data, deficit spending, inadequate reserves and imprudent approval of a 2017 labor agreement with the Sacramento City Teachers Association—a deal negotiated by Mayor Darrell Steinberg that included a 7-percent pay raise, plus a disputed extra raise for mid-career teachers.

According to Sac City Unified, the district must cut $35 million out of next year’s budget and make a further $35 million cut the following year. Officials have identified about $11 million in cuts as of press time.
While the local teachers’ union blames the financial problems on excessive hiring of administrators over the past two years, management places blame on high health care costs for current and retired teachers.

The district’s unfunded liability for retiree health care amounts to an astonishing $726 million, outpacing the unfunded pension liability at $468 million. District officials claim annual health care costs per pupil at Sac City Unified are the highest in the state at $2,476 each year. That’s $500 higher than gigantic Los Angeles Unified.

In addition to facing a cash-flow crisis, the district faces an upside-down balance sheet. The most recent financial statement reports Sac City Unified shows assets of $919 million, dwarfed by liabilities of $1.867 billion. By any normal reckoning, city schools are bankrupt.

A report on school district finances by state Sen. John Moorlach (R-Costa Mesa) placed negative equity at Sac City Unified sixth from the bottom in California, out of 944 school districts.

Is Labor Playing Games to Avoid Cuts?

There is a chance the teachers’ union is avoiding the bargaining table, and even threatening to strike, as part of a high-stakes game of chicken.

Under this theory, the union’s considerable political influence over the state Legislature and Gov. Gavin Newsom will force approval of a special state grant to bail out Sac City Unified and save the union from making concessions on its generous health care benefits. The grant would take the place of an emergency state loan and mandated receivership.

While there are only whispers around the Capitol about the possibility of a state grant, there are signs that a political bid for free money may be forthcoming.

First, the Legislature last year broke precedent and authorized grants to two troubled California school districts: Oakland Unified, which was under state receivership as recently as 2008, and Inglewood Unified, which is currently in receivership. The grants would be in addition to emergency loans these districts required.

State grants to Oakland and Inglewood were severely criticized in a December report by the Legislative Analyst’s Office. Such gifts would make school districts and labor unions far less willing to make spending cuts and contract concessions to close massive deficits. Why cut spending or make concessions if California taxpayers bail you out?

Another sign of a possible push for a taxpayer lifeline to Sac City Unified is the move by Sacramento Assemblymember Kevin McCarty to secure approval to direct the State Auditor to conduct a five-year forensic audit of Sac City Unified. The audit would determine what went wrong and who is responsible—a move strongly supported by the teachers’ union.

The state audit was unanimously ordered in March. (Disclosure: I testified in favor of the audit on behalf of Eye On Sacramento.) It’s important to note that McCarty’s wife, Letitia Garcia, was elected to the Sac City Unified board of education last November.

The audit likely won’t be completed until after the deadline for Sac City Unified to solve its deficit or face a state takeover. One Capitol observer theorized that McCarty, a longtime ally of teachers’ unions, would join the all-powerful California Teachers Association to pressure the Legislature and Newsom to approve an “interim” grant to Sac City Unified, pending completion of the state audit. The gift would postpone, if not entirely avoid, a state loan and takeover.

If the local teachers’ union believes a state handout is possible, there is little reason to accept a reduction in generous health care benefits. But if the union is wrong, the miscalculation could push Sac City Unified into a destructive receivership.

One reason to be dubious of a state handout is the dangerous precedent it would set for a bailout of LA Unified, which has a negative equity of well over $10 billion.

What can you do? Eye On Sacramento is forming an “Eye On Sacramento Schools” unit to address problems such as the ones facing Sac City Unified. If you would like to have a role in bringing change and reform to our city’s schools, please contact me. In my next column, I’ll outline some solutions we are recommending to solve the crisis at Sac City Unified. We could use your help.

Craig Powell is a retired attorney, businessman, community activist and president of Eye On Sacramento, a civic watchdog and policy group. He can be reach at craig@eyeonsacramento.org or (916) 718-3030.