Peterson Endorses Parcel Tax As District Faces Fiscal Emergency

Last week, the Davis School board did what it never thought it would do – put yet another parcel tax on the ballot.  However, under the best case scenario, the governor’s budget provides for flat funding if the November tax measure passes.

Even if that occurs, the district would still lose around three million dollars when Measure A sunsets.

But if the governor’s measure fails, and the trigger cuts get pulled, the district stands to be $7.5 million in the hole.

“The county office of education requires that the proposed budget include an acknowledgement of these fiscal challenges and a plan to address the district budget deficit to be fiscally solvent. The contingency plan will need to include program and staffing reductions as well as collective bargaining concessions,” Associate Superintendent Bruce Colby wrote two weeks ago.

“Without a definitive plan to cover the ‘trigger reductions’ and our budget deficit, we are in fiscal distress and could lose our positive budget certification,” he continued.

The board acted as it felt it needed to.

“Sheila [Allen] and I spent awhile saying that was an emergency parcel tax,” Board Member Gina Daleiden said two weeks ago.  “That was absolutely what I believed at the time.  Things have only gotten worse.  It’s almost unpredictably worse.   If we’re going to say, look, game has changed, we have new information and our first job is to protect the school district as best we can, then I’m willing to talk about continuing what you are already paying to bridge us through some additional time.”

Susan Lovenburg, who just announced her re-election bid, explained to the Vanguard her thinking.

“We have known for some time that Measure A was going to sunset,” she said.  “It was our preference not to renew that tax.  We’ve gone to the community four times in the last five years and every time they’ve responded affirmatively.”

“It was the realization as we were working through the adopted budget for next year, that despite the fact that we made $3.5 million in reductions, despite the fact that we’ve passed a parcel tax in March, we still have a budget that does not hold together for two years,” she continued.

Last night, Nancy Peterson, the only other known candidates for the two spots open on the school board, issued a statement in support of the parcel tax as well.

“The funding of education is a statewide problem.  Budget cuts have left communities on their own to mitigate the impact on their students and I support the proposed parcel tax,” she said. “Today’s students should not have to make do and wait for the state to adequately prioritize public education.”

Ms. Peterson added, “I support the Governor’s tax initiative as a first step toward stabilizing funding because continual budget deficits have heavily impacted communities and created vast disparities in financial support for public education. The current situation is not healthy for the academic welfare of our state. Every child deserves a quality education.”

We often hear the term crisis and emergency misused in the public realm.  If anything, the district right now is understating how dire the situation is in.

Without a new parcel tax and a loss of the governor’s tax measure, the district would be faced with making $7.5 million in cuts on top of what they have already cut.

Susan Lovenburg said the board discussed some of this and it would mean 30 to 65 FTE reduction on top of this year’s 50 positions that were laid off.

“As Winfred said during the meeting, those aren’t cuts that you can make and keep the doors open,” she said.  “So it would involve negotiating concessions to shorten the school year, it would likely involve looking at whether we can consolidate schools, because we’ve really been able to hold that conversation steady – the question of school closure.”

“Cash flow from the State continues to be a challenge and the district could be cash negative at year end based upon the updated payment schedule from the State,” Mr. Colby wrote.

“Should the trigger cuts be pulled, the district will in all likelihood be in a qualified state which is the first step towards state takeover,” Susan Lovenburg said.

Three weeks ago Superintendent Roberson laid out the cash flow crisis.

As we have previously explained, the state is consistently behind on its cash payments to the district.  Cash is what is used to make payroll, make purchases, and run the day-to-day operations of the school district.

Because the state is in fiscal crisis they are deferring on those payments, which means the district has to borrow money short-term to make payrolls and function, and then pay that back when they receive their money from the state.

Right now, the district is in trouble.  The current fund balance is $9.6 million, which is roughly $2 million less than last year at this time.

More alarming, the cash balance is between $3 and $4 million.

In order to borrow the money needed to fund the district, they need 25% of what they are borrowing, or roughly $4 million in the bank, otherwise they lack the ability to borrow money and, absent that ability, they cannot run the district.

As Bruce Colby explained two weeks ago, we are getting close to the point where we lack the cash to make payroll.

If the district runs out of cash, the state will have to loan it money and if that happens, the district ends up in a receivership.  Those who do not believe this is a real possibility need to understand that California last spring had the highest number of districts ever that ended up with the state taking over.

Joel Montero, who is the Deputy Executive Officer of the Fiscal Crisis and Management Assistance Team (FCMAT), explains, “When a district gets to the point where it no longer has the cash to pay its bills, it must apply for a state loan, which means state receivership.”

“A school district receives a qualified or negative certification generally because of its inability to maintain the state-required level of reserves in all three years of its multiyear projections. Running out of reserves by itself, however, does not cause a school district to require a state loan; running out of cash does,” Mr. Montero explains.

Districts have to rely on a cash to pay their bills.  The district typically has had to borrow cash locally using what is called tax and revenue anticipation notes known more commonly as “TRANs.”

As Mr. Montero explains, “All of these options are temporary, short-term borrowing – they generally require that the district pay back the borrowing within a year or less. For each of these types of borrowing, the district is required to prepare a cash flow projection that indicates that the borrowing can be paid back from the district’s future revenues in the time frame required.”

This is where the problem starts to emerge, when cash flow projections show that the district will be unable to pay back the local borrowing and they lack the cash on hand, usually about 25% to make the next payroll, the local district will be unable to keep up with their operational obligations plus pay back the borrowing.

“If the district is unable to borrow locally, then the only other option is to request a loan from the state,” Mr. Montero explains.

This is the situation that the Davis School district is getting perilously close to finding itself in.

A loan requires an act of the state legislature, usually sponsored by the district’s local representative, and as an urgency bill it requires at least a two-thirds vote of each house of the legislature so that it can become effective upon the governor’s signature.

This loan from the state, Mr. Montero explains, results in the state taking control of the district.

“The degree of state control is determined by the size of the loan relative to the district’s budget,” he explains.

If the size of the loan exceeds twice the size of the district required service level, the school board becomes an advisory body only, the superintendent is no longer employed by the district, and a state administrator is assigned and assumes the powers of the Board and Superintendent.

“State loans are typically set up for repayment over 20 years. In both situations above, state control remains over the school district until the loan is fully repaid,” he explained. “The State Trustee or State Administrator reports directly to the Superintendent of Public Instruction – the State of California – not the local school board or community.”

All of the costs of ensuring a fiscal recovery are the responsibility of the district and are added to the amount of the state loan.

“The State Administrator’s mission is to restore fiscal solvency as soon as possible so that the loan can be paid back to the state. This will be done by reducing expenditures to a level that is lower than revenues so that the reserves can be rebuilt over time while the state loan is being paid back. This means that all possible avenues for balancing the budget are pursued,” Mr. Montero continues.

“The State Administrator cannot set aside any contractual obligations that the district has already entered into, including vendor contracts and bargaining unit contracts, without renegotiating them,” he said.  “If modifying provisions of these contracts is critical to gaining fiscal solvency, the State Administrator has the power to invoke the timelines available in the contracts or by law, including the ability to use the impasse/factfinding process to unilaterally impose changes in collective bargaining agreements.”

His final note is that the district remains under some level of state control until the payback is complete and generally speaking, “recovery costs more and takes longer if a state loan is required.”

The most ominous statement, though, comes from Bruce Colby, who warned the board that the district could have a balanced budget but still run out of cash due to deferrals from the state.

—David M. Greenwald reporting