Report 2019-108

Sacramento City Unified School District Because It Has Failed to Proactively Address Its Financial Challenges, It May Soon Face Insolvency

The Governor of California

President pro Tempore of the Senate

Speaker of the Assembly

State Capitol

Sacramento, California 95814

Dear Governor and Legislative Leaders:

As directed by the Joint Legislative Audit Committee, my office conducted an audit of the Sacramento City Unified School District (Sacramento Unified). Our assessment focused on Sacramento Unified’s financial condition, and the following report details the audit’s findings and conclusions. We determined that Sacramento Unified has not proactively addressed its financial problems.

Sacramento Unified failed to take sufficient action to control its costs in three main areas—teacher salaries, employee benefits, and special education. Sacramento Unified increased its spending by $31 million annually when it approved a new labor contract with its teachers union in 2017. Despite warnings from the Sacramento County Office of Education that it could not afford the agreement, the Sacramento City Unified School District Board of Education approved the agreement without a plan for how it would pay for it. Sacramento Unified also failed to control the costs of the generous employee benefits it provides, which increased by 52 percent from fiscal years 2013–14 through 2017–18. We also found that Sacramento Unified lacked clear policies to guide staff on what are appropriate expenditures for special education, limiting its ability to control these costs. Consequently, Sacramento Unified projects it will largely deplete its general fund in October 2021 and will likely need to accept a loan from the State to continue operating. If it accepts such a loan, the required loan payments would result in less funding for students and a loss of local control to an appointed administrator.

Although both Sacramento Unified and its teachers union have proposed changes to stabilize the district’s finances, we found that the proposals are unlikely to solve the district’s ongoing financial problems. In fact, several proposals from the teachers union would increase costs dramatically. Given that accepting state assistance would result in less funds for students, we would have expected Sacramento Unified to develop a detailed plan for resolving its financial concerns, but it has not done so. It states that it needs to make $27 million in reductions by fiscal year 2021–22, but even that amount may not be sufficient to end its deficit spending. We have identified a number of options the district could take, including making changes to salaries and benefits for different groups of employees; however, if it is to avoid the negative effects of insolvency, Sacramento Unified must act quickly to develop and implement a plan.

Respectfully submitted,

ELAINE M. HOWLE, CPA

California State Auditor

Summary

Audit Highlights . . .

Our audit of Sacramento Unified’s financial condition revealed the following:

» Sacramento Unified has not proactively addressed its financial problems and is close to insolvency—it projects facing a $19.1 million shortfall in fiscal year 2021–22.
» At the same time that its fund balance and financial condition declined, Sacramento Unified increased spending for teacher salaries, benefits, and special education.

In 2017 its district board approved a new labor contract that increased teacher salaries by 15 percent, costing an additional $31 million per year.
Despite warnings from the Sacramento County Office of Education that it could not afford the labor agreement, the district board approved the agreement without a plan to pay for it.
Sacramento Unified has failed to control the costs of generous employee benefits it provides, which increased by 52 percent over a five-year period.
Special education costs have doubled and account for 21 percent of the district’s total spending in fiscal year 2017–18.

» Despite the impending risk of insolvency, Sacramento Unified and its teachers union have yet to agree on a solution to the district’s financial problems.
» If it is to avoid the negative effects of insolvency, Sacramento Unified should act quickly to develop and implement a plan to address its increasingly precarious financial situation.

Results in Brief

The Sacramento City Unified School District (Sacramento Unified) is an urban public school district in Sacramento County that serves about 41,000 students and employs 2,200 teachers. Since fiscal year 2016–17, its expenditures have exceeded its ongoing revenue by $9 million to $25.9 million each year. During this same time period, it has increased spending in three main areas—teacher salaries, employee benefits, and special education—without taking sufficient action to control these costs. Because its spending has consistently exceeded its ongoing revenue, it has instead had to rely on reserves from its general fund—the primary fund that the district uses—and on one-time funds to cover its expenditures. As a result, its general fund balance has declined by nearly $30 million over the past three years. Sacramento Unified now projects that by October 2021 it will have largely depleted its general fund and will likely need state assistance in the form of a loan to continue operating. If it must accept such a loan, the resulting loan and interest payments would result in less funding available for students. Further, the terms of the loan would require it to relinquish local control to an appointed administrator who would assume the responsibilities of the Sacramento City Unified School District Board of Education (board) and the district superintendent.

In December 2017, Sacramento Unified significantly increased its ongoing spending when its board approved a new labor contract with its teachers union that increased the amount the district paid for teacher salaries by 15 percent. This labor agreement could ultimately cost Sacramento Unified about $31 million per year in additional costs, an increase of 5 percent in the district’s total spending in fiscal year 2019–20. At the time of the labor negotiations, the teachers union believed that the district’s fund balance was steadily increasing and that teacher salaries were relatively low. However, neither of these beliefs was entirely accurate. Although Sacramento Unified did have lower average teacher salaries than comparable school districts before the 2017 agreement, it consistently maintained the highest average total compensation for teachers because it offered more generous and expensive health care benefits. Further, at the time of the labor negotiations, Sacramento Unified had received one-time funds from the Legislature that likely gave the impression that the district was in better financial condition than it actually was. However, the Legislature allocates one-time funds for a specific purpose, such as satisfying potential outstanding state mandate claims, and for a limited term. Consequently, school districts should not rely on them for ongoing expenses, like teacher salaries.

When its current superintendent joined the district in July 2017, Sacramento Unified and its teachers union had been unable to reach an agreement for nearly a year. According to the district superintendent, he reached an agreement with the teachers union in part because he wanted to avert the negative impact a strike would have on students and their families. However, at the board meeting to approve the labor contract in December 2017, the Sacramento County superintendent of schools (county office superintendent) informed the board that Sacramento Unified could not afford the agreement unless it reduced its budget by $15.6 million. The county office superintendent asked the district to provide a budget reduction plan if it decided to approve the labor contract. Instead of submitting such a plan, the district board chose to rely on one-time funds it anticipated receiving from the proposed January 2018 Governor’s Budget to pay for part of the ongoing salary increases in that year. It did not identify a plan to pay for the increases in future years—an omission that has contributed significantly to its current precarious financial situation. However, because Sacramento Unified projected that it could meet its current and future financial obligations at that time, the county office superintendent could not compel the district to make cuts instead of using the one-time funds.

Sacramento Unified also failed to control the costs of generous employee benefits it provides, which represented almost a third of its budget in fiscal year 2017–18. In particular, it offers costly health care benefits, including fully paid health care for its teachers and their families. In contrast, other nearby districts typically pay for the lowest cost health plan for the employee and their family or pay the full cost for only the employee’s health care. Despite receiving warnings regarding its health benefit costs from entities that have reviewed its budgets since 2003, Sacramento Unified has not taken sufficient action to control those costs when negotiating any of the six agreements that it has entered into with its teachers union since then. Further, despite the county office superintendent’s persistent concerns, Sacramento Unified has not taken sufficient action to control its increasing liability for its retiree health benefits. In part because Sacramento Unified requires teachers to contribute only $20 per month to their retiree health benefits, its liability increased to $726 million in fiscal year 2017–18, or 140 percent of the district’s total spending that year. Further, its contributions toward its teachers’ pension system increased by $15.2 million from fiscal years 2013–14 through 2017–18, in part because of the higher salaries the district agreed to pay as a result of the 2017 labor contract.

Finally, Sacramento Unified has done little to control its special education costs, which grew by 31 percent from fiscal years 2013–14 through 2017–18, reaching 21 percent of its total expenditures. The district lacks clear policies to guide staff on identifying appropriate expenditures for special education, which limits its ability to control these costs. In addition, it has not applied for all available funding. Specifically, the State provides reimbursement for extraordinary special education costs, such as the costs of residential treatment for students who receive special education services. However, according to Sacramento Unified’s special education director, the district did not apply for this funding because the State caps the total reimbursement amount it will pay statewide. We estimate that Sacramento Unified could have been eligible for up to $1.4 million over five years if it had applied for these funds.

Despite the impending risk of insolvency, Sacramento Unified and its teachers union have yet to agree to a solution to the district’s financial problems. They each recently made proposals regarding the budget, but it is unlikely that either proposal can solve the district’s ongoing financial challenges. In fact, several of the teachers union’s suggestions would increase the district’s costs dramatically. In contrast, Sacramento Unified’s proposal could result in significant savings; however, implementing it would require substantial concessions from the teachers union. Given that accepting state assistance would result in the appointment of an administrator for the district and would have significant implications for the district’s students and community, we expected Sacramento Unified to have developed a detailed plan for resolving its financial concerns. However, it has not done so. We identified a number of options it could take, including making changes to salaries and benefits for different groups of employees. If it is to avoid the negative effects of insolvency, Sacramento Unified should act quickly to develop and implement a plan to address its increasingly precarious financial situation.

Key Recommendations

Legislature

To help ensure that county office superintendents can prevent school districts under their oversight from becoming insolvent, the Legislature should consider amending state law to require school district boards to obtain approval from their county office superintendents before considering significant spending actions.

Sacramento Unified

By March 2020, Sacramento Unified should 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 potential or proposed 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 retiree 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 effect 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.

Agency Comments

Both the county office superintendent and Sacramento Unified generally agreed with our recommendations. The county office superintendent questioned its ability to ensure that Sacramento Unified implemented our recommendations. Sacramento Unified noted that implementing some of the recommendations would require negotiated solutions with its teachers union.