The $6 million question

Jan Combes works out of an office crowded with bookshelves she had made out of wood recycled from school bleachers. She’s quick to point out that she paid for the cabinetry herself.

From behind her desk in the Chico Unified School District’s headquarters in a historic building that occupies about a half-block on East Seventh Street, the assistant superintendent for business spends hours trying to balance the district’s budget. Combes knows the flow charts, graphs, diagrams and budgets that show about 60 different sources of revenue and where that money goes better than anyone in the district.

As chief financial officer, she’s an expert on the rat’s maze of school financing.

Whether she can make spending balance with revenue depends on matters as large as state funding and as minor as flu season. On paper, she can keep the district, with its 12,318 students, running until Aug. 1, 2010.

On that day, CUSD could run out of enough cash to make its $8-million-a-month payroll. It could happen sooner, later, or not at all, of course.

But if it does happen, this is what it will mean:

There will be no more packed school board meetings where parents and students wave banners and take the podium to defend band or bilingual education or football or a fired school principal. In return for bailing out the district with a pricey loan, the state will turn the school board into a merely advisory body, metaphorically behead Superintendent Kelly Staley, and run the district from her office.

Simply put, it will be the end of local accountability for several years, and the district will be in debt to the state for a couple of decades.

It could be argued that Chico Unified went broke on good intentions and a bad economy. It went broke, in part, by providing what parents wanted when it could no longer afford to provide luxuries. It provided small primary-grade classes and offered high-school electives like French IV and ran tiny community schools in places like Cohasset and Forest Ranch.

It went broke giving raises to teachers it can no longer sustain after the union fought for and won the 2006 collective bargaining agreement.

It went broke because a former superintendent made a foolish gamble on an effort to boost the attendance rate and overestimated income by $1.1 million for a two-year period.

In the treacherous world of school financing, it went broke because a school board trusted him.

And after it finally recovered its footing by slashing millions of dollars from its budget, it discovered the system had been rigged against it. A bankrupt state of California slashed funding by almost 19 percent and delayed payment on 25 percent of what remained. Ultimately, CUSD went broke because it didn’t have the savings to sustain a $14-million hit.

Many educators worry that Chico Unified is the iceberg’s tip, at the crest of what will be a wave of insolvencies in the wake of funding cutbacks to California schools. This story is about how a district, without resorting to graft, fraud or even large-scale mismanagement, became that iceberg’s tip.

In less than a year, a district that has won accolades for excellence and innovation could become an example of how quickly a public school system can be dismantled. In a state takeover, the superintendent would be removed from her position and a state administrator would assume responsibility for getting the district in the black. He or she could then impose cuts that would be deep and unforgiving, obliterating what remains of CUSD’s music, art and athletics. The administrator could also impose salary and benefit rollbacks on employee groups if contract negotiations stalled.

Grappling now with a deficit of $6 million a year, Chico Unified hopes to escape a takeover by reaching an agreement with its unions that will roll back salaries for all employees, from Superintendent Staley to teachers to custodians. It’s proposed what it calls a “fair-share model”; the teachers’ portion would save the district $3.88 million a year.

“We’re asking that everyone take an equal step backwards so that we don’t have to look at positions and programs,” Combes said. But if there’s another round of funding cuts in the coming year, the district may have to lay off counselors, nurses and librarians and look at “things we’ve always held sacred,” she warned.

The most immediate obstacle may be the district’s relationship with the teachers union, one that has often been characterized by distrust and rancor.

Jim Williams, bargaining chairman for the Chico Unified Teachers Association, was chafing last week over the district’s presentation of its contract proposal that would cut teacher pay by 5 percent and freeze step increases for two years. The document also outlines the fair-share model, explaining the sacrifice each employee group will be asked to make.

On Nov. 6, the district e-mailed its weekly “Superintendent’s Update,” including the contract proposal, to district employees and the press. District officials said they had been asking union leaders to open a contract discussion with them for several months. “We were told no,” said Bob Feaster, assistant superintendent for human resources. “We need to get something moving here rather than delay, delay, delay.”

By sending out the contract proposal in that fashion, Williams said, the CUSD is attempting to bargain directly with its teachers, and it may be possible to file an unfair-labor practices complaint. “They wanted things done in a hurry,” Williams said.

The union has been conducting a member survey, a poll that will tell it what teachers are willing to give up, if anything. The district, meanwhile, must begin preparing legislation that will be introduced in early January that will get it a state bailout if contract negotiations fail to produce the needed results.

Williams is a soft-spoken man who teaches eighth-grade history at Bidwell Junior High School, but there’s an edge to his personality that might explain why he’s been bargaining chairman of Chico Unified Teachers Association for almost six years. When he’s relaxed and doesn’t think a reporter is scribbling away, he tends to make funny, biting remarks, often about the direction of public education or the district’s spending habits.

Union leaders have fumed for several years over one of those spending habits—teacher overstaffing—that they say has cut into the district’s ability to give pay raises. CUTA’s Web site accuses the district of “fiscal mismanagement” and “misplaced priorities.”

Williams said he’s not yet sure whether drastic pay cuts are necessary, in spite of ominous warnings from Combes, the county, and even the state Fiscal Crisis & Management Team. He said this of the district: “They’re doing a good job of preparing for a worst-case scenario,” adding that another round of state funding cuts “will put the district over the edge.

“We know they have a problem,” Williams said, “but I don’t think the sky is falling. For years, we’ve been told they’re in dire financial condition. They come to the table saying they’re broke. So now, they’re saying they’re in this condition, and there are some arched eyebrows.”

Sometime this month, CUSD will resort to inter-fund borrowing to cover its bills. About a million dollars will be taken from the district’s developer-fee fund and replaced when CUSD receives its share of property-tax revenue in December. Increasingly, district officials and trustees sound desperately worried.

“We’re running out of time—our cash flow will be depleted by August,” school board President Jann Reed said late last week. Referring to the union, she said, “They’re posturing. It’s a game, and they’re good at it. But in this case, we’re not in a place where we can wait. Nobody but the union questions whether this is a crisis.”

The Fiscal Crisis & Management Team has already declared the district in fiscal emergency and in December will present its report on district finances.

When Combes was hired in October 2007, she wasn’t sure where to look for the cause of the district’s deficit spending. She had already helped a Hayward school district become solvent, though that district’s problems were different from Chico’s.

“My first three or four weeks here, I was going down the hall and saying [to colleagues], ‘Can we do this?’ It would turn out that it was already being done. You know what to look for when you’re trying to save a school district, but everything in our book of tricks was being done.”

What she found in Chico Unified surprised her. There were no signs of fraud or significant waste. Instead, she found a district that was, as she puts it, “program rich,” or as the union puts it, “overstaffed.”

The district was offering an array of programs, including GATE (Gifted and Talented Education), Open Structure and Two-Way Spanish Immersion at two elementary schools. It was hanging on to its 20-1 student-teacher ratio in kindergarten through third grade.

There were elective classes like journalism that had only 10 or 15 students. There was the Cohasset elementary school that had only 40 students.

Combes found the root of Chico Unified’s budget deficit in what she calls the community’s “culture.”

“The district for many years had tried to meet every community need,” Combes said. “It was doing nice things, but they were not things a district that’s not fiscally sound would do.”

Then, in December 2006, the district gave teachers a raise of 11 percent over a three-year period. “It was a raise we couldn’t afford,” Combes said flatly.

Enrollment in Chico Unified had begun declining in 1999, when 282 kids failed to show up for school in the fall. The district was trimming its budget but struggling to keep up with an enrollment decline that was cutting into state funding known as “ADA” that is based on average daily student attendance.

The cuts required hard decisions that inflamed community groups, and were often decisions the board had struggled with earlier.

In the past two years, CUSD has eliminated about 90 teaching positions, often to the chagrin of parents. Though union leaders dispute this, Combes says the district is now “tightly staffed.” And Trustee Andrea Lerner Thompson, a mother of two Chico students, agrees with Combes. She said students in some Chico High School classes are “packed in like sardines, especially at the beginning of the year.”

Ironically, what the union calls “fiscal mismanagement” is often traced back to the three-year collective-bargaining agreement signed in 2006. Whether you lauded that contract or feared it, it marked a turned point for Chico Unified. The board immediately set to work to pare the district’s budget, cutting $3 million in two years.

But it wouldn’t be enough; the contract was founded on what Combes calls a pair of “faulty assumptions.”

Faulty assumption No. 1 baffles many to this day. The district, then under the direction of Superintendent Chet Francisco, based an income projection on an attendance rate ratcheted up from what was expected by about 1 percent.

Francisco may have believed Chico Unified could improve its attendance rate, thereby increasing its share of ADA funding. It launched an attendance-improvement program. But that spring, the flu swept through Chico schools, and in the end the district missed its mark by 1 percent, costing it $1.1 million in income over a two-year period that it had planned on.

Francisco, who resigned in June 2007, couldn’t be reached for comment on this story. But Assistant Superintendent Feaster, who worked under Francisco, defended his former boss as an administrator who “cared deeply” about Chico students. “From the get-go, he [Francisco] believed we could improve attendance,” Feaster said. “He even went around to the schools and talked with attendance clerks to get ideas.”

Faulty assumption No. 2 is understandable. It was assumed state funding was a stable revenue source; in fact, the pot of money known as COLA—cost of living adjustment funding—had been growing. But the state began cutting its funding to schools in the 2008-09 school year; in fact, funding “just fell off the cliff,” Kevin Bultema, assistant superintendent in the Butte County Office of Education, said.

The teachers union had come to bargaining sessions in 2006 in a combative mood, convinced it had a right to a COLA-funded cost-of-living raise. It had been four years since it had won a raise for its members. And the previous raise had been given only after a collective-bargaining battle and teacher picketing.

On Dec. 6, 2006, Francisco bought the district labor peace. The district and the union settled on the three-year contract. Because the district’s “faulty assumptions” didn’t look faulty on paper, Combes says, they helped convince Francisco, the board and even the county education officials who approved the CUSD’s budget that the raise was affordable. The last 3 percent of that raise was given in January 2008.

There was nothing, recalled Board of Trustees President Reed, to draw their attention to the attendance-projection figure; it wasn’t recognized as a number that was unusual or ambitious. Furthermore, trustees say that after Francisco’s surprise resignation, they came to learn they had been deprived of staff reports that contained useful information, that he had discouraged his staff from communicating directly with the board.

Francisco had been hired in September 2005 from Riverside County after former Superintendent Scott Brown resigned mid-term. “We trusted that our superintendent with 18 years of experience knew how to do this,” Reed said. “After [he] left, the house of cards fell; it left us in a precarious situation.”

Because of that experience, Reed says they’re a “smarter board now” that asks tougher questions.

Lerner Thompson had just been seated on the board the night of the Dec. 6 meeting when the collective-bargaining agreement was approved. She regrets voting for the contract, and said: “If I had it to do the whole thing all over again, I would abstain until I had time to do research. We got into the pay raise for all the right reasons, but ultimately cannot sustain what we gave.”

Lerner Thompson agreed the board has learned from mistakes, though she doesn’t think there’s been enough owning up. “I don’t know if as a school district and board that we have taken much responsibility for the situation we’re in,” she said. “It’s not just the state that got us here. We made some wrong calls.”

In summer 2007, the Butte County Office of Education intervened, giving CUSD only “qualified” budget approval and warning it that it was dipping dangerously into its reserves.

When Kelly Staley became superintendent at the end of 2007, she was braced for a challenging job that would involve more budget-cutting after many years of the same, and knew it would require a can-do attitude. That was before the state crashed.

In some ways, Staley is quintessential Chico. Her grandparents owned a gas station on Park Avenue. The superintendent is an unpretentious horsewoman who was promoted to an interim position when Francisco left. She still carries “interim superintendent” business cards and jokes about the district’s tight budget when she hands them out.

A former teacher and school principal and the daughter of educators, she is seen as more approachable than her predecessors, Brown and Francisco, someone who has a love of the classroom and a commitment to Chico. Many teachers interviewed for this story spoke warmly of her.

Under Staley’s guidance, CUSD had almost stomped out its deficit by the end of 2008, despite the loss of 1,763 students over a decade. Its reserves were at almost 3 percent of its total budget, the minimum level required by the state. But within a few weeks of that achievement, the state went into budgetary meltdown.

“By then, we had already cut millions of dollars,” Staley said. “I said, ‘Oh my gosh, what do we do now?’ The districts that are weathering the storm had reserves of 5 to 10 percent.”

Staley and her staff quickly decided there was only one recourse—employees’ salaries. It would give them enough money to plug what was now estimated to be a $6-million yearly deficit, and allow them to leave in place skeleton athletic, arts and library programs, which wouldn’t produce the cost savings needed even if they were eliminated.

“Chico got caught in a perfect storm” of state funding cutbacks, enrollment decline and its own administrative turmoil, Bultema said. “With declining enrollment, you have to be cutting ahead of the curve, which is difficult to do. It’s hard to go to a bargaining unit and ask for pay cuts based on projections. That’s a difficult thing to tell people. Fiscally, you need to be conservative. But you can’t be so conservative you lose people’s trust.”

Bultema said school financing is so complex that it’s “difficult to get to what the problem is. At the end of the day you have to have trust, and trust is easily lost.

“We’re in very tumultuous times figuring out how we’re going to finance education,” he added. “We’ve been going down to Sacramento every month, screaming to the wind that, ‘Hey, this thing’s about to derail.’”

Eight California school districts have gone broke in recent years, and 19, according to a legislative analyst contacted for this story, were on a watch list earlier in the year because they’re in danger of going broke. According to Staley’s office, 104 California school districts are depleting their reserves and in danger of entering a deficit-spending cycle like the one that got CUSD into so much trouble.

Most of the school districts that have been taken over by the state, to date, are large, urban districts. Many were guilty of something terrible, like gross mismanagement or fraud. One district, in King City, south of Salinas, went broke in the wake of state funding cuts.

During a recent visit to Chico, Joel Montero, CEO of the Fiscal Crisis & Management Assistance Team, told local educators that he has visited many school districts in disrepair, schools that seemed to have abandoned their mission. Not so in Chico, he said. And that’s what makes Chico’s story important: It’s the story of a school district that went broke trying—some would say too hard—to serve its community.

Reed said trustees were trying to “keep cuts away from students. Sure, we could have staffed to contract, but it wasn’t the best thing to do for students. We can argue about whether it was the right thing to do. … It was the last thing we did, and ultimately it’s how we saved the most money.”

Almost everyone interviewed for this story commented on his or her concern that the system for funding public education is falling apart, and many wanted to talk about the future of public education in the Jeffersonian sense—education that’s available to everyone in some equitable form, the kind that a public school system tries to offer.

“The solution has to come from the public,” Williams said. “Cutting teachers’ salaries to allow a dysfunctional system to function won’t solve anything. We want a Mercedes Benz, but only fork out for a Volkswagen.”

Joe Rios has often been the only parent attending recent board meetings to learn about the district’s financial crisis. Sometimes he gets up to speak, a lone and plaintive voice. “Is there a way to issue another bond?” Rios asked the board in October. “I don’t think the community really knows what’s at stake. I think we can somehow figure this out.”

He recalls board meetings just one year ago that were packed with parents protesting cuts to athletics and music. Schools that end up without extracurricular activities and electives, Rios said, will leave many children disenfranchised.

“If we don’t do something for these kids, it’s going to come back and bite us. It’s really scary to think your kids might see school as jail.”

August 1999—CUSD enrollment declines for first time, by 282 students. Trend will continue in following years.

September 2005—Chet Francisco hired as CUSD superintendent.

Dec. 6, 2006—School board agrees to 11 percent pay hike for teachers based in part on an attendance projection 1 percent higher than previously figure.

June 2007—Francisco resigns, Kelly Staley becomes interim superintendent.

October 2007—Assistant Superintendent for Business Jan Combes hired; Butte County Office of Education assigns “fiscal expert” to work with CUSD.

December 2007—Kelly Staley becomes permanent superintendent after serving as interim since Francisco resigned in June. CUSD has a $400,000 deficit. Announces “negative certi-fication,” predicting its reserves could be depleted by June 2009.

December 2008—After making numerous budget cuts, CUSD comes close to balancing its budget and shaking off its negative certification. But by January 2009 it’s clear there will be huge state funding cuts.

February 2009—CUSD issues layoff notices to 183 teachers; 136 of those will actually lose jobs.This is on top of 61 lost jobs in 2008.

March 2009—CUSD increases class size in K-3 to 30-1, taking advantage of state’s effort to give school districts more flexibility over funds.

April 2009—CUSD receives $4.4 million in stimulus funding, enabling it to fill the equivalent of 40 full-time positions.

Oct. 21, 2009—State fiscal expert warns school board about the dire consequences of takeover.

Nov. 6, 2009—Bypassing union, Staley goes directly to teachers, asking them to take 4 percent salary reduction, plus a 1.64 percent pay cut in exchange for three furlough days.

Aug. 1, 2010—Date district is expected to run out of money.