Report 2019-108 Recommendation 6 Responses

Report 2019-108: Sacramento City Unified School District: Because It Has Failed to Proactively Address Its Financial Challenges, It May Soon Face Insolvency (Release Date: December 2019)

Recommendation #6 To: Sacramento City Unified School District

To address its current financial problems, Sacramento Unified should do the following:

By March 2020, adopt a detailed plan to resolve its fiscal crisis. The plan should estimate savings under multiple scenarios and include an analysis that quantifies the impact of reductions the district can make to ongoing expenditures. Specifically, Sacramento Unified should consider the impact of possible salary adjustments for employees in different bargaining units and include the impact those salary adjustments would have on postemployment benefits, such as pensions. It should also use the most recently available data to estimate net savings from modifying the health care benefits it provides to employees, as well as the impact those modifications would have on the total compensation of the employees. Finally, it should calculate the impact of possible changes to district and employee contributions to fund future retiree health benefits. The district should use the plan it develops as the basis for its discussions of potential solutions with its teachers union.

Annual Follow-Up Agency Response From September 2023

The District's 2023-24 Adopted Budget and subsequent AB1200 public disclosure of collective bargaining agreements were reviewed and approved by the Sacramento County Office of Education. Additionally the State's COLA, other funding sources and strong ending fund balance from the 2022-23 year have improved the District's fiscal outlook. See the most recent adopted budget and budget approval letter from SCOE: https://www.scusd.edu/sites/main/files/file-attachments/10.2_board_approved_adopted_budget_2023-24.pdf?1687990875 and SCOE letter.

California State Auditor's Assessment of Annual Follow-Up Status: Partially Implemented

Although the district notes that SCOE approved its fiscal year 2023-24 budget, SCOE's approval letter identifies multiple factors that clearly demonstrate why Sacramento City needs a long-term financial plan. SCOE notes that while the district currently has sufficient reserves, it plans to spend $33.9 million more than the unrestricted revenue it receives in fiscal year 2023-24, $18.3 million in fiscal year 2024-25, and $32.2 million in fiscal year 2025-26. SCOE also notes that the district does not have an agreement with its classified staff for fiscal year 2022-23 and does not have an agreement with any of its staff for the current school year. SCOE notes that cost increases from those labor agreements could result in the district being unable to meet its reserve requirements. Further, SCOE indicates that one-time federal funding the district received will begin to expire in fiscal year 2023-24, which will then require the district to identify ongoing funding to replace the one-time funding or terminate services and staff. All of these factors comprise a precarious financial position, and the district could benefit from developing a long-term financial plan to address the identified issues.

Annual Follow-Up Agency Response From October 2022

The District has taken action and a fiscal recovery plan to address the deficit was approved by the Board in December 2021. Additionally, the State's COLA and other funding sources significantly improved the District's fiscal outlook. FRP adopted 12/16/21:

https://www.scusd.edu/sites/main/files/file-attachments/approved_copy_-_fiscal_recovery_plan.pdf?1641511320

2022-23 Budget adopted 6/23/22:

https://www.scusd.edu/sites/main/files/file-attachments/10.2_item__2022-23_adopted_budget_scusd_06.23.22.pdf?1659550307https://www.scusd.edu/budget-updates

See September 15, 2022 letter from SCOE providing conditional approval of district budget: https://www.scusd.edu/sites/main/files/file-attachments/scoe_letter_9-15-22_re_2022-23_adopted_budget_report.pdf?1664386988

California State Auditor's Assessment of Annual Follow-Up Status: Partially Implemented

Despite developing a fiscal recovery plan, the district has not made changes that would address its structural deficit. In its response to our recommendations, the Sacramento County Office of Education (SCOE) notes that despite one-time federal and state funding that will mitigate the district's structural deficit over the next few years, Sacramento Unified is facing reduced revenue due to declining enrollment and related revenue loss and significant ongoing fiscal pressures for program services. Therefore, SCOE conditionally approved the district's fiscal year 2022-23 budget, asked the district to refrain from taking actions that would further increase its ongoing costs, and that it is continuing to maintain the current fiscal advisor to support the district. The budget that SCOE conditionally approved projects a decrease in the district's fund balance by $5.3 million in fiscal year 2023-24 and $13.6 million in fiscal year 2024-25. Until it addresses its structural deficit, the district will not have addressed its financial risks.

Annual Follow-Up Agency Response From October 2021

The Budget Department presented a fiscal recovery plan (FRP) for budget reductions to the Board, which was adopted on February 4, 2021. See Attachment 1.

The Budget Department presented a proposed budget for all funds to the Board, which was adopted on June 24, 2021. The department's most recent budget update occurred on August 19, 2021. See Attachments 2 and 3.

On September 15, 2021, the Sacramento County of Education (SCOE) issued its 2021-22 Adopted Budget Conditional Approval letter. The 2021-22 Adopted Budget has been conditionally approved and the District must meet various directives and timelines as provided by SCOE. Indeed, the District is required to submit a Board approved FRP plan to the County Superintendent and take any immediate actions needed to implement the plan no later than December 15, 2021. See Attachment 4.

As previously reported, the District's attempts to discuss a successor contract with the Sacramento City Teachers Association (SCTA) have been delayed by numerous factors, including the COVID-19 pandemic. In addition, on June 9, 2021, the California Public Employment Relations Board (PERB) found that SCTA failed to negotiate in good faith with the District over a successor contract for over a year and failed to respond to the District's proposals which unreasonably delayed negotiations and thwarted the possibility of reaching an agreement. See https://www.scusd.edu/pod/scta-successor-contract-negotiations. SCTA sent its most recent proposal to the District on August 25, 2021. The District's proposals, including its proposal to achieve health care savings, are also located at the above link, which continues to be updated.

The department and staff responsible are Superintendent Aguilar and Chief Business Officer Rose Ramos.

California State Auditor's Assessment of Annual Follow-Up Status: Partially Implemented

1-Year Agency Response

The Budget Department presented a fiscal recovery plan (FRP) that includes both negotiable and non-negotiable options for budget reductions to the Board on November 19, 2020 and received feedback. The Board is set to vote on the FRP at the December 10, 2020 board meeting.

As you are aware, the District has previously passed a proposal to reduce its current 100% Healthcare premium contribution to an industry standard level which would save over $17 million dollars each year. In addition to negotiable items, some of the major items contained within the draft FRP include significant program and site reductions and associated layoffs of staff and administrators. The FRP presentation is available at: https://www.scusd.edu/sites/main/files/file-attachments/frp_ppt_v2_fnl.pdf?1606274802 and the details of the plan that is summarized on slide 32 of the Power Point located: https://www.scusd.edu/sites/main/files/file-attachments/frp_details_slide32.pdf . The detailed summary and impact statements for each potential reduction are provided at item 9.3 of the December 10, 2020 Board items: https://www.scusd.edu/boe121020.

The most effective and equitable solution to the District's budget deficit will be found through negotiations for a successor contract with our bargaining partners, and specifically related to achieving a balanced District contribution to its employees' health care plans. Unfortunately, as we reported in July and August, the District's attempts to discuss a successor contract with the Sacramento City Teachers Association (SCTA) have been delayed by the focus on the safe reopening of our schools and serving the needs of particularly vulnerable student groups. Board approved FRP evidence to follow.

California State Auditor's Assessment of 1-Year Status: Partially Implemented

Although Sacramento Unified's fiscal recovery plan is an important step toward resolving its financial challenges, it has several shortcomings. Specifically, its plan does not clearly address the district's looming cash challenges and relies on spending reductions that require agreements with collective bargaining groups that have yet to materialize. Sacramento Unified's fiscal recovery plan indicates that the district will need to make $51 million in ongoing

expenditure reductions based on its projected budget deficit for fiscal year 2022-23 and identifies options to reduce costs that require and do not require negotiations with its labor partners. We are concerned that the district's plan does not fully address its near-term cash shortfalls that the district expects could occur in fiscal year 2021-22. Further, much of the district's solution for its deficit relies on reductions that require negotiations with its teachers union—an effort that has to date been unsuccessful.

At the district's December 10, 2020 board meeting, the board voted to discuss the fiscal recovery plan further in February 2021.

6-Month Agency Response

The FRP is an evolving plan and currently being reevaluated in light of the changed state budget.

Due to the drastic reductions in the state budget, the District's projected solution has increased substantially from the $27M previously required to achieve fiscal solvency. The District recently presented its 3rd interim presentation at the 5/21/20 Board meeting containing discussion of the impact from state revenue reductions on the evolving Fiscal Recovery Plan (FRP): https://www.scusd.edu/sites/main/files/file-attachments/10.3_may_revise___scusd_budget_myp_5_21_20__final.pdf

As recognized by the Audit, the majority of the FRP involves changes to District represented employees' health care contributions and overall compensation, with the largest portion of that from certificated employees. In addition to what is "already on the table", the FRP analysis included cost savings items for further consideration. The District continues to further evaluate existing and potential new proposals with our labor partners. After holding the first negotiation session with SCTA on March 3, 2020, negotiations again stalled. Initially, SCTA requested that the District provide a budget presentation at the next session to which the District agreed. Then, SCTA made multiple information requests and the parties had lengthy discussions regarding distance learning during the COVID-19 school closures. SCTA finally agreed to hold the next session which was just held on June 9. The District has filed an Amended Unfair Practice Charge against SCTA detailing the continued pattern of delay which is set for hearing in late August 2020.

The District's proposed adopted budget will be presented on June 18 and the budget will be adopted on June 25.

California State Auditor's Assessment of 6-Month Status: Pending

The district states that it is developing a Fiscal Recovery Plan, which it notes is currently evolving and being evaluated. We are concerned that the district has yet to develop a detailed plan to address its declining financial condition. In addition, the economic impact of the COVID-19 pandemic certainly has added an additional financial strain for the district. It is therefore even more imperative that the district act quickly and judiciously to develop and implement a plan to resolve its fiscal crisis. Further, we expect to see action taken in its fiscal year 2020-21 budget.

Because of the impending risk of insolvency and lack of substantial progress on some of our recommendations, we believe more frequent updates from the district are necessary. Therefore, we requested that the district provide us another update in July and monthly thereafter.

60-Day Agency Response

The District presented the 2019-20 First Interim Financial Report's Fiscal Recovery Plan (FRP) at the February 6, 2020 Board meeting. https://www.scusd.edu/sites/main/files/file-attachments/9.2_17.pdf

An updated FRP will be included in the 2019-20 Second Interim Financial Report in March 2020 which will include more detailed negotiable and non-negotiable items. As recognized by the Audit, the majority of the FRP involves changes to District represented employees' health care contributions, with the largest portion of that from certificated employees. The District electronically issued its proposal related to limiting healthcare costs and increasing employee OPEB contributions to SCTA on August 2, 2019.

The District filed for an impasse determination from the Public Employment Relations Board (PERB) on December 20, 2019, and again on January 13, 2020, thereby following the statutory process for attempting to move negotiations forward when there is a stalemate as recognized by the Audit. And, while those impasse applications were declined by PERB, we are pleased that there may be some positive developments for commencing negotiations with SCTA. While we would have preferred to begin this critical work this month, we look forward to beginning negotiations on March 3, 2020. See 3 Audit update letters.

The District has, and will continue to, base its FRP and its negotiation proposals on the latest relevant data related to projected ongoing expenditures and potential reductions, including changes to health care contributions.

California State Auditor's Assessment of 60-Day Status: Pending

We look forward to reviewing the district's updated fiscal recovery plan. When considering efforts it needs to take to address its financial condition, we would remind the district to consider if the actions it takes will be sufficient so that in future years it does not fall back into a financial crisis as we show in Figure 9 on page 35 the audit report.

All Recommendations in 2019-108

Agency responses received are posted verbatim.