Your primer to the Sac City Unified budget crisis – how did we get to now?

Sacramento City Unified School District is chipping away at expenses in a last-ditch effort to close its $35 million budget gap, but time is running out and a state takeover seems imminent.

The unprecedented rejection of the district’s budget in August by the Sacramento County Office of Education appeared to take many by surprise – but Sacramento City’s fiscal problems didn’t happen overnight.

Auditors have noted that sharp turn toward insolvency came on the heels of the 2017 labor contract between the district and teachers, which narrowly averted a strike. They said that deal combined with other factors, including a decade of financial missteps, leadership problems, labor strife and shrinking student enrollment, to take the district to the brink of disaster.

Here’s who is involved in the budget crisis, how the finances went off the rails, what the future might hold, and what it could mean for the district’s students and their families.

The players

Sacramento City Unified School District: The district is home to more than 42,000 students and 3,000 teachers in 81 schools. It’s the 11th-largest school district in California, with an annual budget of nearly $400 million.

Sacramento City Teachers Association: The SCTA is one of five unions in the district. Representing about 2,500 teachers, it’s the seventh-largest teachers union in California, according to its website. It is an affiliate of the California Teachers Association and the National Education Association. The union and the district are at odds over contract negotiations, with SCTA members currently voting whether to authorize a strike.

California Department of Education: If Sacramento City Unified determines it has become insolvent and needs an emergency loan to pay its bills, it will request one from the state Education Department. That request triggers a state takeover. The department has appointed a trustee for all previous state takeovers, including Oakland Unified in 2003 and Inglewood Unified in 2012. But that responsibility has shifted. Since the passage of Assembly Bill 1840, signed into law last year, the authority to appoint an administrator lies with the school district’s county superintendent.

Sacramento County Office of Education: The county education department, led by Sacramento County Superintendent of Schools Dave Gordon, has been monitoring Sacramento City Unified closely since it started showing signs of financial duress a decade ago. If the district requests a loan from the state, Gordon will assume all legal rights, duties and powers of the school board. He would then appoint an administrator.

Sacramento City Unified Superintendent Jorge Aguilar: Aguilar arrived after a long period of management turnover. The district had gone through six superintendents, some temporary, during the past 15 years. When Aguilar joined the district in mid-2017, it had a $5-million budget surplus, but the relationship between the district and its teachers was poor. A teachers strike was narrowly averted in November 2017 after more than a year of bitter contract negotiations. But labor tensions are again running high amid the financial turmoil.

Sacramento City Unified Board of Education: The board has eight members, including seven trustees elected by trustee area to four-year terms. The eighth member is a high school student selected to a one-year term by the Student Advisory Committee. The board is responsible for general district oversight, including hiring the superintendent. It approves or rejects the administration’s policy, budget and personnel decisions. If the district goes into state receivership, fiscal decisions will be taken out of its hands. The board selected Area 7 trustee Jessie Ryan as its president in 2017.

Sacramento Mayor Darrell Steinberg: Steinberg joined the budget wrangling that averted a teacher strike in 2017. He scribbled a back-of-the-napkin deal that included an 11 percent increase to teacher salaries – an agreement that the union says the district has walked away from.

FCMAT: The state-created Fiscal Crisis and Management Assistance Team provides financial advice, administrative help and training at the request of school districts and county offices of education. In December 2018, FCMAT presented an audit that warned Sacramento City Unified that if it failed to correct its budget deficit, it would face a state takeover in six months. The independent team faulted the district, which announced it would run out of money by November 2019.

California Legislature: Assemblyman Kevin McCarty, D-Sacramento, requested a state audit of the district, which was approved Wednesday by the Joint Committee on Legislative Audit. The audit is scheduled to begin on May 1. If the district requests an emergency loan, it must be appropriated by the state Legislature.

What went wrong?

In the last four fiscal years, between 2013 and 2017, Sacramento City Unified ran surpluses, according to its financial statements and FCMAT.

And then in 2017-18, the district suddenly ran a deficit of nearly $10 million. What caused the crisis?

Insufficient cuts: In April 2008, the county office of education changed Sacramento City Unified’s certification from positive to qualified because the district had not identified enough cuts, and some of the millions targeted still needed board approval.

In 2010, when Jonathan Raymond assumed the role of district superintendent, Gordon noted in a letter that some big-ticket items identified by the district for cuts – namely, furlough days and health benefits – required union negotiations.

“Our understanding is that formal negotiations have only just begun,” read Gordon’s letter. “The timeline is tight and there is little or no room for deadline modifications.”

The county’s Office of Education showed signs of faith in the district. In 2012, it concurred with the district’s qualified certification despite some reservations.

“Our decision to not downgrade the district budget to a negative certification was based on our reliance on the district’s implementation of its budget reduction plan,” read Gordon’s letter.

But the district took risks. Lots of them.

Cash flow estimates submitted by the district in 2012 showed that it would require $50 million in tax revenue anticipation notes – money that it didn’t have in hand, but that it expected from tax increases proposed by Gov. Jerry Brown. Gordon asked the district to prepare a contingency plan if the governor’s tax increases failed to materialize. Ultimately, the money did not come through, forcing the district to spend down millions of dollars from its general funds.

‘Leadership issues’: The December FCMAT audit criticized Sacramento City Unified for past mismanagement, communication failures and inexperienced staff that contributed to its ongoing budget problems.

“It is a governance and leadership problem, period,” FCMAT CEO Mike Fine said when he delivered the audit. “And it’s many years of governance and leadership issues – not purely the last twelve months.”

The audit found that the district’s business team did not communicate enough with other departments, making it more difficult to solve fiscal problems. It also said the district’s staff underutilized software and lacked understanding of how to maintain and analyze data.

Salary agreement, continuing labor strife: While Sacramento City Unified traveled a long road into fiscal trouble, with many warning signs along the way, its finances took a precipitous turn after the district and teachers signed a new labor contract.

The deal was brokered by Steinberg, Aguilar and the union at the mayor’s Greenhaven house over a weekend in November 2017 as a strike loomed. It provided a 7.5 percent salary increase for teachers with an additional 3.5 percent adjustment to mid-range salaries.

At the time, it was lauded as balance between fiscal prudence and paying teachers fairly.

But independent auditors now say that while the salary increases weren’t solely to blame for Sacramento City’s fiscal woes, after the deal was signed, the district quickly slid toward insolvency.

“What happened in 2017 was the tipping point. That seems to have changed the financial picture,” said Michelle Giacomini, FCMAT’s deputy executive officer and author of the district’s fiscal analysis.

Standard & Poor’s credit rating agency cited a dramatic decline in Sacramento City Unified’s fund balance, primarily due to cost increases for staffing and benefits, when it downgraded the district’s bond rating to near rock-bottom in January.

Asked by The Bee whether he now has regrets about the deal, Steinberg declined through a spokeswoman to comment. Aguilar also declined, citing current negotiations.

According to a Bee story at the time, the school district and teachers union agreed to negotiate together with the district’s health care providers to lower health care costs. If they could find ways to save money, they would try to fund nurses, counselors and mental health workers, as well as reduce class sizes.

But just weeks after the deal was signed, Gordon warned that the agreement would drain Sacramento City’s reserves within two years, and the district would have to propose new cuts to avoid being placed on the state’s early financial warning list.

Gordon said the district would need to reduce its budget by $15.6 million for the 2019-20 school year to avoid “falling into a structural deficit.”

But reductions were not made.

“At the point when it was reached, it was clear that the budget reduction was necessary to offset the agreement,” said Giacomini. “And that didn’t happen. It’s not that it couldn’t be afforded, it’s that it had to happen with the reduction.”

Meanwhile, the contract continues to be the main source of strife between the district and the union.

The S&P agency cited that conflict when it downgraded the district’s bond rating in January, noting that negotiations have had a “contentious nature.”

To date, some of the 2017 agreement has been implemented, but the two sides hit an impasse on the 3.5 percent salary adjustment for mid-career teachers.

The district in November filed a complaint in Sacramento Superior Court requesting a declaration that there was not an agreement between both parties.

The district says that under the contract, the increase would cost $7 million. The district claims that the SCTA’s proposed adjustment would cost $14 million, which the district said it cannot afford.

The court mandated the two sides head back into arbitration, which were set to begin Friday.

The SCTA says it would work with the district to ensure any pay increases do not exceed the agreed-upon levels for the 2018-19 school year and beyond.

Other spending decisions: The labor agreement wasn’t the only wallet-buster.

The Sacramento City Teachers Association argues that several moves by Aguilar actually triggered the deficit: A vacation buyout program that paid administrators cash for accrued vacation time in order to bring down balance expenses; the decision to hire 20 new administrators that the union said cost $4 million; and a $3 million summer program the union said was not budgeted for.

And county officials and auditors have pointed to financial mismanagement dating back more than a decade under several of Aguilar’s predecessors.

Gordon delivered written warnings to the district as early as 2007 to avoid relying on one-time funding, which he said had been a district practice for years.

“The budget is again balanced using one-time funds,” read one letter from Gordon to then-Sacramento City Superintendent Carillo Mejia. “The district continues to rely on one-time funding to solve budget ongoing deficits.”

That year, the district used $3.6 million in one-time revenues.

In 2018, Gordon warned the district again to not resort to the “poor business practice.” But when district budgeted for the funds again, it anticipated that it would receive $20.2 million from the state – $11.4 million in one-time revenues – to cover its recent $15.6 million shortfall.

“We would just hope that a grant comes in, and with the hope that that funding won’t go away,” district spokesman Alex Barrios said. “Well this year, in a lot of cases that funding did go away.”

The county suggested the district instead divert the one-time funds to its promised long-term retiree benefits — another financial drain that the county had asked the district to address for years.

Health benefits: The county Office of Education had been asking the district to address its retiree benefits and lack of proper funding since 2007.

Employees’ health benefits are locked down in a decades-old agreement that provided generous compensation: free health care. But the cost of benefits has increased over the years.

More than 1,500 teachers in the district are making more than $100,000 in total compensation – salary and benefits combined. Some of those teachers’ salaries vary between $47,000 and $90,000.

Only in the past decade did teachers begin paying $20 a month toward their health care benefits to offset some of the costs.

The district says it spends more on health benefits than any other district in the Sacramento region, with most employees opting for the “Cadillac plan.”

“We feel we invest the most,” Barrios said. “We’re told we aren’t doing enough, and it’s very hard to see these dollar amounts and say we are not investing.”

Data show that few other school districts in the region provide lifetime health benefits after retirement, such as Davis Joint Unified and Elk Grove Unified. But their plans are prefunded, with contributions made to offset future liabilities. By contrast, Sacramento City Unified’s liability is more than $700 million..

Enrollment declines: A shrinking student population has put further strain on the district’s finances.

School districts’ funding from the state is directly tied to the number of students enrolled. And Sacramento City’s enrollment has been declining for the last 15 years, according to the December FCMAT report. Gordon cited enrollment decline as a concern in his letters to the district dating back to 2007.

Such declines have led to school closures in other districts like Oakland Unified, which was taken over by the state in 2003.

While Sacramento City Unified would not speculate on the future of its schools, a state takeover would demand deep cuts beyond stringent budgeting.

What’s likely to happen?

Although the district has scrambled to patch its budget hole, Gordon and FCMAT chief executive Mike Fine warned in late February that a state takeover was imminent. Here is how that could play out.

Administrator appointed: If the district runs out of cash, it will have to request a loan from the state, which would place it in receivership, Fine said.

Upon the district’s receipt of the loan, Gordon would assume the powers and responsibilities of the district’s governing board. He would then appoint an administrator to act on his behalf.

The new administrator is not obligated to consult with the school board or district superintendent, Gordon told The Bee last year.

What happens to the teacher contract?: Under a takeover, the district’s labor contracts stay in place and negotiations continue, according to Giacomini.

But because the district spends 91 percent of its general funds on salaries and benefits – 6 percent more than the state average – employees could see cuts as future contracts are hammered out in negotiations.

Most of the nine California school districts taken over by the state since 1990 experienced some rollbacks in salaries or benefits.

What is really at stake, what could students lose first?: The district says it is adamant about keeping the cuts as far away from classrooms as possible.

The school board has approved a motion to lay off employees, citing a decline in student enrollment. District officials identified full-time positions in several departments that could be reduced, including vacant positions. About 150 of those positions belonged to K-12 teachers. Notices of potential layoffs will be issued March 15, but it won’t be known until the end of the school year how many teachers will actually receive pink slips.

The board also decided at its most recent meeting to cut 33 administrative positions, on top of $1 million in previous reductions.

The last time the district faced mass layoffs was in 2016.

“If people don’t feel like we are in a budget crisis right now, it’s because they have been trying their hardest not to impact the community,” Barrios said. “But that could only last so long until we have collaboration with all labor parties in how we balance the budget.”

With the challenges of a state takeover, the district could see enrollment drop even more in the next few years, prompting school closures.

Officials have pointed to Oakland Unified as a possible harbinger of things to come. That district’s teacher strike just ended, and teachers received an 11 percent raise.

The Oakland district is still under state receivership, after the state loaned it $100 million in 2003. Since the takeover, the district’s enrollment has dropped from about 54,000 to 37,000 according to court documents, and 18 schools have closed. Fourteen of those schools have reopened as charter schools.

The contract deal includes a five-month freeze on school closures after the district looked to close or merge as many as 24 schools in the next five years.

Troy Flint, spokesman from the California School Boards Association, attended a Sacramento City Unified board meeting in February, drawing a comparison between the two districts.

Today, Oakland Unified owes about $33 million, roughly the same debt that sent it into state takeover, and also the same amount of debt that Sacramento City Unified is in today. Flint said that Oakland Unified still has not recovered from its financial woes, and encouraged the board to make difficult choices now rather than later.

“I assure you that the alternative is worse,” he said.

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Sawsan Morrar covers school accountability and culture for The Sacramento Bee. She grew up in Sacramento and is an alumna of UC Berkeley Graduate School of Journalism. She previously freelanced for various publications including The Washington Post, Vice, KQED and Capital Public Radio.