Hacienda La Puente Unified School District

Transcription

1 Hacienda La Puente Unified School District Fiscal Review April 12, 27 Joel D. Montero Chief Executive Officer

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3 April 12, 27 Dr. Barbara Nakaoka, Superintendent East Gale Avenue City of Industry, California Dear Superintendent Nakaoka, In March 26, the Fiscal Crisis and Management Assistance Team (FCMAT) entered into an agreement for a fiscal review with the. The request specified that FCMAT would: 1. Conduct a review of the district s 25-6 second interim financial report for all the general fund, adult education and child development funds including revenue, expenditure, and ADA/enrollment information. 2. Prepare a general fund multiyear financial forecast to identify the district s financial position in 26-7 and 27-8 if enrollment continues to decline and no changes other than statutory COLA, step and column, and consumer price index trends are applied. 3. Determine the current level of risk to the district s fiscal health using the FCMAT Fiscal Health Risk Analysis model. The attached final report contains the study team s findings with regard to the above areas of review. We appreciate the opportunity to serve you, and we extend our thanks to all the staff of the. Sincerely, Joel D. Montero, Chief Executive Officer Fiscal Crisis and Management Assistance Team FCMAT Joel D. Montero, Chief Executive Officer th Street - CITY CENTRE, Bakersfield, CA Telephone Fax Petaluma Blvd North, Suite. C, Petaluma, CA Telephone: Fax: Administrative Agent: Larry E. Reider - Office of Kern County Superintendent of Schools

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5 TABLE OF CONTENTS i Table of Contents Foreword...iii Introduction... 1 Study Guidelines... 1 Study Team... 2 Executive Summary... 5 Findings and Recommendations... 9 Declining Enrollment and Budget Reductions...9 Communication...11 Budget Development and Oversight...12 Position Control and Staffi ng...16 Categorical Programs and Special Education...17 Multiyear Financial Projection...21 Fiscal Health Risk Analysis...29 Appendices...43

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7 FOREWORD iii Foreword FCMAT Background The Fiscal Crisis and Management Assistance Team (FCMAT) was created by legislation in accordance with Assembly Bill 12 in 1992 as a service to assist local educational agencies in complying with fiscal accountability standards. AB 12 was established from a need to ensure that local educational agencies throughout California were adequately prepared to meet and sustain their financial obligations. AB 12 is also a statewide plan for county offices of education and school districts to work together on a local level to improve fiscal procedures and accountability standards. The legislation expanded the role of the county office in monitoring school districts under certain fiscal constraints to ensure these districts could meet their financial commitments on a multiyear basis. AB 2756 provides specific responsibilities to FCMAT with regard to districts that have received emergency state loans. These include comprehensive assessments in five major operational areas and periodic reports that identify the district s progress on the improvement plans Since 1992, FCMAT has been engaged to perform more than 6 reviews for local educational agencies, including school districts, county offices of education, charter schools and community colleges. Services range from fiscal crisis intervention to management review and assistance. FCMAT also provides professional development training. The Kern County Superintendent of Schools is the administrative agent for FCMAT. The agency is guided under the leadership of Joel D. Montero, Chief Executive Officer, with funding derived through appropriations in the state budget and a modest fee schedule for charges to requesting agencies. Total Number of Studies Total Number of Districts in CA Management Assistance (94.59%) Fiscal Crisis/Emergency (5.41%) Note: Some districts had multiple studies. Districts (7) that have received emergency loans from the state. (Rev. 2/7/7) Study Agreements by Fiscal Year Number of Studies /93 93/94 94/95 95/96 96/97 97/98 98/99 99/ /1 1/2 2/3 3/4 4/5 5/6 6/7 Projected Hacienda La Puente Unifi ed School District

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9 INTRODUCTION 1 Introduction The (HLPUSD), located in the Los Angeles County community of La Puente, serves a diversified population of approximately 25, pre-kindergarten through twelfth grade students and 3, adult students living in the communities of La Puente, Hacienda Heights, and portions of Valinda and West Covina. The district also provides instructional services for one of the largest correctional programs in the nation. It is comprised of four comprehensive high schools, one alternative high school, one community day school, 2 K-5 elementary schools, four K-8 schools, six middle schools, one specialized orthopedic program for special needs students, and numerous child development and preschool programs. The large adult education program operates in over 32 satellite facilities. In spring 26, the district contacted the Fiscal Crisis and Management Assistance Team (FCMAT) requesting a management review of the budget and budgeting process after discovering that a budget shortfall was imminent due to deficit spending brought about mainly because of declining enrollment that had not been discovered in a timely manner. FCMAT was initially asked to perform services related to the 25-6 financial records after approval of the study agreement. The study agreement is attached as Appendix A to this report. The scope and objectives of this study are to: 1. Conduct a review of the district s second interim financial report for all funds including revenue, expenditure, and ADA/enrollment information. 2. Prepare a general fund multiyear financial forecast to identify the district s financial position in 26-7 and 27-8 if enrollment continues to decline and no changes other than statutory COLA, step and column, and Consumer Price Index (CPI) trends are applied. 3. Determine the current level of risk to the district s fiscal health using the FCMAT Fiscal Health Risk Analysis model. The scope of the study changed slightly after FCMAT s initial visit because the district s data was not in a format that could be used to prepare the multiyear projection. This matter will be discussed further in another section of this report. Hacienda La Puente Unifi ed School District

10 2 INTRODUCTION Study Team The FCMAT study team was composed of the following members: Michele McClowry Fiscal Intervention Specialist Fiscal Crisis and Management Assistance Team La Verne, California Carleen Wing Chandler FCMAT Fiscal Consultant San Juan Capistrano, California Margaret Rosales FCMAT Fiscal Consultant Kingsburg, California Laura Haywood Public Information Specialist Fiscal Crisis and Management Assistance Team Bakersfield, California Study Guidelines FCMAT consultants visited the district on several occasions to conduct interviews, collect data and review documentation. This report is the result of those activities. Findings and recommendations are presented in the following sections: Executive Summary Background Findings and Recommendations o Declining Enrollment and Budget Reductions o Communication o Budget Development and Oversight o Position Control and Staffing o Categorical Programs and Special Education Multiyear Financial Projection Fiscal Health Risk Analysis FCMAT first visited the district in March 26 to begin the study. The study team was asked to prepare a multiyear projection (MYP) based on the district s working budget as of the 25-6 second interim report. The MYP could not be completed at that time because some of the data in the second interim report had not been updated. The MYP process requires uploading budget information from a mainframe computer system into a software program, assuming that all budget line items are complete and accurate. The base data was deemed incomplete when various test assumptions did not produce plausible data. This situation was discussed with the district administration on March 22, 26, and it was mutually decided to adjust the study agreement and postpone the preparation of the multiyear projections for a few weeks to allow the district time to review all of the budget line items in question. It should be noted that the major budget components were deemed reasonable; it was specific line item detail that, when uploaded, was found to be incomplete. Fiscal Crisis & Management Assistance Team

11 INTRODUCTION 3 During the initial visit, FCMAT also reviewed records, interviewed employees, examined numerous financial reports, and gathered other pertinent information to meet the objectives of the study agreement. The team was able to complete an analysis of the budgeting process and make other useful observations to help the district improve operations and move forward with making the budget reductions that were necessary to remain fiscally solvent. It was decided at that March 22 meeting that FCMAT would issue a management letter describing the preliminary findings and recommendations. The full text of that management letter is included as Appendix B to this report. FCMAT returned to the district for the second time in June 26. By that time the district had completed the second interim report and also issued a third interim report to inform the community, employees and the Los Angeles County Office of Education (LACOE) of the current budget status and project the ending balance for However, the data in the mainframe computer system still could not be uploaded into the FCMAT MYP software program. Since the year was almost over, FCMAT met with the district s administration on June 14, 26 and it was once again mutually agreed that preparing the MYP would be postponed until late August, after the 25-6 accounting records were closed, the state-required SACS unaudited actual documents were finalized, and the 26-7 budget was approved by LACOE. The 26-7 adopted budget would then become the base year for the multiyear projections rather than the 25-6 second interim projected budget. A second management letter was sent to the district dated July 19, 26, summarizing the context of this meeting. The full text of the second management letter is included as Appendix C to this report. FCMAT returned for the third time on August 21 and 22, 26, just prior to the departure of the former Assistant Superintendent of Business. Once again, FCMAT found that the data in the district s financial system was not in pristine condition, but with certain assumptions and adjustments made by FCMAT, the MYP could be prepared. The multiyear financial projection included in this report is based on the financial data that was available in August 26. A third management letter summarizing FCMAT s progress at this point in time was issued on August 6, 26. The full text of that letter is included as Appendix D to this report. In January 27, FCMAT again met with district staff to gather as much information as possible as to the current financial status of the district. This information included review of the 26-7 first interim report and the 25-6 financial audit report. It was reported to FCMAT that the district recently settled negotiations at 4% for all bargaining groups, but the cost of this settlement was not included in the district s 26-7 first interim report. Hacienda La Puente Unifi ed School District

12 4 INTRODUCTION Fiscal Crisis & Management Assistance Team

13 EXECUTIVE SUMMARY 5 Executive Summary As with nearly half of all California school districts, the Hacienda La Puente USD has experienced significant declining enrollment over the past few years, forcing the district to make significant budget reductions in 25-6 and Enrollment and ADA must be carefully monitored monthly. Staffing should be adjusted as enrollment numbers change. FCMAT was asked to review the budget development process and prepare a multiyear projection to help the board and administration determine the accuracy of the budget and the reductions necessary to remain fiscally solvent. Due to several unforeseen circumstances related to the condition of the data in the financial system, FCMAT visited the district on three different occasions between March and August 26 to gather and process the information for the multiyear projection. The district administration and board implemented over $3 million in cuts in 25-6 and another $5.7 million in Because of these aggressive actions, the FCMAT MYP indicates that the district will adhere to the AB12 requirements to meet its financial obligations in the current and two subsequent years. However, this FCMAT MYP was prepared prior to the district s recent negotiations settlement of 4% with all bargaining units. FCMAT returned to the district again in January 27 to review the 25-6 audit report and the 26-7 first interim report, but the interim report did not include the cost of the negotiation settlement in the district-prepared multiyear projections. FCMAT identified several areas where the district could make changes to improve communication, keep key district stakeholders better informed, and improve overall operations. Most of the employees interviewed by FCMAT expressed that they were caught completely by surprise when the administration announced that major cuts would be necessary. The district should implement procedures to keep employees and the community informed. Regular meetings, newsletters, and the district Web site are ways to achieve this goal. Principals and department managers state that they are not involved in the budgeting process. Continuing to utilize the budget committee, making regular board presentations, discussing budget issues at management meetings, and working with managers to develop budgets for their sites will address that concern. One of the most important budget monitoring tools is a fully integrated position control system to track and control employee salaries and benefits. The district s position control system is manual and is not integrated between human resources, payroll and the budgeting process. Budget preparation and monitoring rest almost entirely with the Director of Fiscal Services, whose workload is overwhelming. The district risks the chance of errors and untimely budget updates because the position control system is not totally reli- Hacienda La Puente Unifi ed School District

14 6 EXECUTIVE SUMMARY able and most of the responsibility is assigned to one person. Staffing ratios should be developed and followed to ensure fairness and prevent overstaffing and overspending. Evaluating and monitoring the assignments of special education instructional assistants may yield some savings. The district uses multiple software systems, the in-house Business Operating Support System (BOSS) and the LACOE PeopleSoft and human resources systems for payroll, which flows directly into the PeopleSoft system but not into BOSS. Agencies using multiple systems must constantly reconcile the data to maintain financial integrity and reliable records. FCMAT could not verify the accuracy of the data in either system because the reports did not match. The use of multiple computer systems creates a duplication of work for the Human Resources and Business departments. The district s Business Office does not have a process for reconciling the data in the two systems until the year-end closing of the financial records. The district receives considerable categorical funding each year. There has been a historical pattern of carrying over a large portion of the categorical funds each year. Better planning to use the categorical funds more effectively may help ease the burden on the unrestricted general fund. The 25-6 year end actual financial report yielded a much larger ending balance than the administration had projected in the interim reports. The board should be kept informed monthly of the status of the budget, especially during times when the budget is under scrutiny by the community and employee bargaining groups. The district consistently meets the statutory requirements of preparing and submitting the budget for adoption and the interim reports on time, but beginning a monthly budget revision cycle would help to project a more accurate ending balance and facilitate better planning during the budget development cycle each year. Fiscal Crisis & Management Assistance Team

15 BACKGROUND 7 Background The district s once-large reserve balance of $25 million dwindled over several years and has been used to cover the deficiencies between revenues and expenditures. Until the recent budget reductions were implemented, the district continued to deficit spend even though budget adjustments were made in prior years. The deficit spending has largely been due to declining enrollment and the district s inability to quickly respond by adjusting the budget. The decline in enrollment was even greater than anticipated in 25-6, leaving the district facing budget reductions of at least $5.7 million in 26-7 on top of $3 million in cuts implemented in 25-6 to retain fiscal solvency. At the time of the initial FCMAT fieldwork, the district was in the process of submitting a qualified 25-6 second interim report to the Los Angeles County Office of Education because the board and administration had not had sufficient time to identify or approve appropriate budget reductions before the statutory deadline to submit the second interim report. The projected ending balance for 25-6 would barely meet the minimum 3% reserve for economic uncertainties required by the state without significant budget cuts. The district s financial situation was very serious. Employee contract negotiations were in progress during the FCMAT fieldwork. Only the smallest bargaining unit (SEIU) had settled its contract by August 26. The budget included an allowance to cover a 2% increase for all employees in Subsequent to the FCMAT fieldwork, the district settled negotiations for 26-7 at 4% for all bargaining units. It may be difficult for the district to explain to the public why salary increases are awarded while budget reductions are being made. Hacienda La Puente Unifi ed School District

16 8 BACKGROUND Fiscal Crisis & Management Assistance Team

17 DECLINING ENROLLMENT AND BUDGET REDUCTIONS 9 Findings and Recommendations Declining Enrollment and Budget Reductions As with many California school districts, Hacienda La Puente has been experiencing declining enrollment. The consequences of declining enrollment and deficit spending must be regularly and carefully managed to avoid financial insolvency. The district used excess ending reserves to balance the budget over the past several years. Using onetime ending reserves to balance the budget shortfall must cease. The administration and board have kept budget reductions as far away from the classroom as possible, but few future cuts can be made without drastically affecting student programs or amending bargaining agreements. With 9% of the unrestricted general fund budget devoted to employee compensation, the bargaining units and the administration must work closely to help the district avoid insolvency. The Director of Human Resources prepares enrollment projections, which are reviewed by the Assistant Superintendent of Business. Student enrollment and the corresponding average daily attendance (ADA) are the key factors in the amount of state funding received in revenue limit funds. Enrollment levels were down more than projected, exacerbating the budget shortfall in District staff must review and update enrollment projections at least three or more times per year and throughout the budget development process, and adjust staffing accordingly. In the past, some budget reductions have not materialized due to subsequent decisions by the administration or Governing Board. One example is the last-minute 25-6 change in the high school teacher staffing ratio from 34:1 to 33:1 that occurred just before the start of school in 25. The budgeted savings from a teacher ratio of 34:1 were not realized, so onetime reserve funds were used to cover the deficit. In the future, programs should not be added or enhanced without carefully identifying an ongoing funding source or negative impact to the budget. FCMAT did not delve into the specific budget reductions being considered by the administration and board of trustees, but it was noted that the district has several small elementary schools with fewer than 3 students enrolled. The administrative and operational costs to maintain a small school are nearly as high as those of a larger campus. Other school districts facing critical budget deficits have been faced with similar difficult decisions to close small schools or adjust boundaries to smooth out enrollment. The district should seriously consider closing small schools during the next budget development cycle if deficit spending cannot be curbed. The budget cuts and savings that were implemented in 25-6 and 26-7 must be accurately monitored to ensure that full implementation continues to result in expected Hacienda La Puente Unifi ed School District

18 1 DECLINING ENROLLMENT AND BUDGET REDUCTIONS savings. The LACOE requires the district to submit a detailed, accurate budget reduction plan and multiyear projection by June 3 each year indicating that the district could meet its financial obligations in the current and two subsequent years, along with its adopted budget. The 26-7 budget was submitted on time and approved by the County Office. The 26-7 first interim report was prepared and submitted to LACOE on time but did not include the cost of the 4% salary increase approved by the Governing Board. The district has taken a proactive, responsible approach to address the budget shortfall in 25-6 and The administration and board must work diligently to find ways to reduce the budget when necessary with as little impact to students and employees as possible. As the district faces major budget reductions in future years if enrollment continues to decline, the availability of cash to cover current expenditures may be tight. Monthly cash flow projections should be prepared and cash regularly reconciled to better manage cash and plan the timing of certain types of expenses. Employee contract negotiations were in progress at the time of the FCMAT study and were recently settled for Making sure that all bargaining groups understand the seriousness of budget issues is of utmost importance. The district must carefully explain to the public why salary increases may be approved while budget reductions are being considered, especially if the board should discuss closing small schools in the future. Hiring and retaining the best teachers, managers, and classified employees is critical to the success of the instructional goals of the district. Balancing the needs of students and employees while maintaining fiscal solvency is essential for any school district. Recommendations The district should: 1. Educate the public and employees about the effect of declining enrollment on district revenues. 2. Monitor enrollment monthly. 3. Regularly discuss and address enrollment and any enrollment changes with the Governing Board. 4. Provide the board with updated budget information on the actual savings achieved compared to the amounts approved as budget reductions. 5. Consider all options if future budget reductions are imminent, including the cost of operating small schools. 6. Include all managers and principals in the budget development process. Fiscal Crisis & Management Assistance Team

19 COMMUNICATION 11 Communication Communication may not have been sufficient to keep key stakeholders and employees informed about the budget shortfall. Most employees stated that the budget problems caught them by surprise and they were unaware that major budget reductions were being considered. The most common complaint from staff was that communication was sporadic or inadequate and must be improved to ensure that all parties are kept apprised of the board s decisions during any budget reduction process. The perception is that the budget problem may not have been real because spending on major and facility and technology project is ongoing. Employees and the public may not completely understand the difference between unrestricted general fund operating dollars and the various restricted funding sources available for construction and other specific programs. Interviews with various district employees revealed a lack of understanding of the district s budget problems and funding sources. Most employees stated that the budget problems caught them by surprise and that they were unaware that major budget reductions were being considered. The Business Department must keep the lines of communication open with its principals and department heads. Many districts use a detailed budget calendar to help managers meet key deadlines and participate in the budget development process. Open communication, beginning budget work early, and including stakeholders in the decision-making enable school districts to effectively work through difficult budget reduction processes. All parties should be kept informed over the next few months to ensure that the budget savings are properly calculated and incorporated into the final adopted budget. Recommendations The district should: 1. Find ways to improve communication throughout the district. 2. Open lines of communication with all key stakeholders, including parents, bargaining units, management and supervisory employees, and community members. 3. Consider a series of voluntary workshops, community meetings at schools, newsletters, and use of the district s Web site to communicate with district stakeholders, especially during times when the district faces budget reductions. Develop and use a detailed calendar to help meet deadlines and keep managers informed. Hacienda La Puente Unifi ed School District

20 12 BUDGET DEVELOPMENT AND OVERSIGHT 4. Include all managers and principals in the budget development process. 5. Present facility information at board meetings to keep constituents and community members informed about funding sources and progress of construction projects. 6. Explain the restrictions on capital facilities funds and other restricted funding sources. Budget Development and Oversight Responsibility for developing a district s budget generally resides with the business office under the direction and oversight of the Chief Business Officer. Budget revisions, monitoring, and financial reporting are usually the responsibility of the director of fiscal services, with changes submitted by budget managers throughout the district. Budget monitoring is essential to ensure that district funds are used correctly and effectively. The Director of Fiscal services develops and monitors the district s budget. Managing a budget as complex and intricate as that of HLPUSD is a daunting task. Five business office employees are assigned to budget tasks, but three of them are reasonably new to their positions and have limited experience. The staff turnover and lack of experience have placed a heavy burden on the director, creating a major backlog in budget revisions. The high turnover in key personnel in 25-6 may have kept the seriousness of the budget crisis from being adequately communicated to the board, staff and community. The district s multiple software systems have made budget development and monitoring difficult and time-consuming. The business office must develop, manage, revise, and monitor the budget and financial resources in a timely manner to retain the district s fiscal viability. The budget should reflect the district s goal to provide a comprehensive instructional program. The level of student enrollment, number of sites, impact of contractual obligations, and past practices often determine the budgeting process used by a school district. A successful budget model establishes a level of financial confidence in the district. Throughout the process, budget managers must be provided with clear and concise procedures to follow. Budget development should begin early in the year, preferably in January after the governor proposes the budget for the upcoming fiscal year. The first step in the process is to approve a budget calendar indicating the due dates that must be met to adopt the district s budget by June 3 each year. A well-managed budget development calendar serves two purposes: It allows site and department budget managers to identify their needs for the upcoming year and it strengthens communications between the managers and the business office. Fiscal Crisis & Management Assistance Team

21 BUDGET DEVELOPMENT AND OVERSIGHT 13 The district distributes an annual budget guide. However, budget managers may not always be fully trained or included in budget development. This seems especially true with regard to federal and state categorical programs. Most budget managers at sites and departments can access their budgets online, but need more training to use the system more effectively. Budget managers need to be held accountable for budgeting accurately and not overspending their allocations. The business office staff should meet with budget managers and principals at least once in the spring to discuss budget assumptions and assist in budget development, and again in the fall to review prior year carryovers. As the district may begin considering reductions and further changes in the budget for next year, it should develop a process to fully define anticipated increases or decreases in spending. Once the options are identified and prioritized, a full cost analysis must be completed to determine the total savings of each. For example, when positions are created or eliminated, the cost of statutory benefits and health coverage must be calculated along with salaries to quantify the full dollar value of these changes. Once budget reductions are approved by the board, the cuts must be implemented and monitored to ensure that the anticipated savings are realized. Proper planning and cost analysis will protect the district s future financial health. The business staff should strive to complete any current budget adjustments quickly to facilitate the preparation of multiyear projections that will accurately verify and forecast the financial condition of the district this year and in two subsequent years. The district should continue using a budget committee. Many school districts use budget committees with members representing all employee groups and community stakeholders to review and prepare recommended budget reductions to the board. A budget committee helps communicate financial information to constituents, and would enhance trust among the constituencies in the district. The district uses multiple computer systems: the in-house BOSS system and the Los Angeles County Office (LACOE) PeopleSoft and Human Resources systems for payroll, which flows directly into the PeopleSoft System but not into BOSS. Agencies using multiple systems must constantly reconcile the data to maintain financial integrity and reliable records. The use of multiple computer systems creates a duplication of work for the Human Resources and Business departments. The HLPUSD business office does not have a process for reconciling the data in the two systems until the year-end closing of the financial records. The district does not have a reliable, ongoing budget monitoring process in place. When the study team visited the district in March, June, and August, many revenue and expenditure accounts had not been reviewed to determine if the estimates should be adjusted Hacienda La Puente Unifi ed School District

22 14 BUDGET DEVELOPMENT AND OVERSIGHT based on changes in enrollment or federal or state allocations. Additionally, the 26-7 first interim report indicated the same restricted carryover as the prior year, indicating that categorical spending had not been well planned. The overwhelming workload of the Director of Fiscal Services complicates routine budget monitoring, which could mean that the district does not have a good picture of changes that may have occurred during the year. Also, the district is not able to accurately reflect its net ending fund balance throughout the year if budgets are not kept up to date. If possible, budget revisions should be taken to the board for approval more often than just at interim reporting deadlines. Budget-to-actuals summaries should be prepared and submitted to the board as a discussion item monthly. This should make interim reports more useful and give the board a more accurate idea of the district s finances. Submitting the summaries monthly also would allow the board and community to understand why variances are occurring. The summaries should be presented to the board for information, comment and direction if action is needed. When interim reports are prepared, they must include the very latest information with projections of the district s financial condition at the end of the year. Interims should be considered the nearest thing to closing the books, which means updating budgets to annual estimates and reviewing general ledger accounts to ensure that the balances reflected are accurate and that no balances need to be cleared. Valid, thorough budget updates with projections of the district s ending fund balance will ensure an early warning of any discrepancies between the budget projections and actual revenues or expenditures. The district does not have a computerized integrated position control system. This issue will be discussed later in this report, but the method used currently requires manual tracking of employee placement with step and column movement and actual health benefit costs budgeted, assuming that every certificated employee may move a column on the salary schedule. This practice likely has the effect of overstating budgeted salary costs. Additionally, because of the lack of a computerized position control and budget projection system, the district uses an average amount to project health benefits. This practice could overstate or understate the budget for health benefit costs. When the district prepares the cost estimate for step and column movement of teachers, it does not prepare the net cost of retirements and resignations. This practice tends to overstate the actual annual cost of step and column movement. The cost of salaries and benefits makes up approximately 9% of the district s unrestricted general fund budget. Unanticipated increases in these categories can quickly change the fiscal stability of a district. An integrated position control system establishes authorized positions by site or department and ensures that staffing levels and payroll expenditures conform to the district formulas and standards, preventing overstaffing and overpayments. Fiscal Crisis & Management Assistance Team

23 BUDGET DEVELOPMENT AND OVERSIGHT 15 The district does not appear to have a budget allocation policy related to replacement of furniture and equipment at schools. Interviews with school administrators revealed that schools are expected to use discretionary funds or categorical funds to replace items such as computers, classroom furniture, lunch tables, etc. This process has led to a perception of unequal distribution of resources and could violate supplanting regulations for categorical programs. The district currently pays retiree health benefits for employees to age 65. The unrestricted general fund currently pays all costs for this program regardless of the employee s original funding source. These expenditures should be charged to the program or fund where the employee originally worked. The 25-6 second interim report for the adult education fund was budgeted incorrectly. Revisions submitted to the business office by the Assistant Superintendent were not promptly updated. Based on FCMAT s interview with the child development program director, the second interim report for that fund also was incorrect. All operating funds such as the adult education fund, child development fund and cafeteria fund should be updated every time the general fund budget is revised, especially at interim reporting periods. Recommendations The district should: 1. Review the need to maintain dual financial systems. 2. Schedule training sessions on district budgets for school administrators, managers and secretaries. 3. Ensure that the Business Department reviews the budget monthly and adjusts revenue and expenditures as needed. 4. Provide assistance for the Director of Fiscal Services to ensure that all funds and budget line items are reviewed regularly. 5. Ensure that schools and departments have access to up-to-date and accurate budget information, and hold them accountable for not overspending budgets and for following established purchasing procedures. 6. Present budget changes and monthly budget summaries for the board to review, discuss and approve at a public meeting, accompanied by the rationale for any changes. 7. Continue to utilize a budget committee. Many school districts budget committees include members from all employee groups and community stakeholders to review and prepare recommended budget reductions for the Governing Board. 8. Carefully prepare the interim reports to include the very latest information with projections of the district s financial condition through the end of the year. Hacienda La Puente Unifi ed School District

24 16 POSITION CONTROL AND STAFFING 9. Work to establish a more accurate method to estimate annual column movement costs based upon the average actual column movement in several prior years. 1. Review the estimated health benefit costs to actual health benefits costs to determine if the current budgeting method should be further refined. 11. Prepare step and column estimates to include new hires and the effect of retirements and resignations. 12. Charge retiree health benefits appropriately to all funds and categorical programs. Accomplish this by using a benefits account object code and charging a small percentage of retiree benefits against each payroll as allowed. Use these accumulated funds from all sources to pay for retiree health benefit costs. 13. Develop a district-level budget process whereby schools sites can request funds for replacement of old, broken, vandalized or stolen furniture and equipment. 14. Identify a long-term funding plan for replacement and maintenance of the district s significant investment in technology. 15. Ensure that all fund and program budgets are updated at interim reporting periods. Position Control and Staffing One of the most critically essential budget development and monitoring tools is a position control system to monitor and authorize staffing, and identify employee salary and benefit costs. A reliable position control system also is an integral part of the overall internal accounting controls to ensure that only authorized positions are filled and salaries and benefits are budgeted and paid only as approved by the Governing Board. Salaries and benefits are approximately 9% of the district s general fund budget. Unanticipated increases in these categories can quickly alter a district s fiscal stability. An integrated position control system establishes authorized positions by site and department and ensures that staffing levels and payroll expenditures conform to district formulas and standards, preventing overstaffing and overpayments. The HLP position control system is not computerized or integrated with human resources, payroll and budget. Instead, employee tracking and budgeting for salaries and benefits is managed manually by the Human Resources Department and Fiscal Services. The Director of Fiscal Services uses an Excel spreadsheet based on payroll information to identify current employee salaries and benefits. Data in the Human Resources Department is managed using spreadsheets and by memory. Human Resources tracks and fills positions. Implementation and utilization of a reliable, computerized position control system by human resources, budget and payroll should be a top priority. This would enable human resources and the business office to jointly maintain salary and benefit information. It would only allow payroll to pay employees based on the information in the system. This separation of duties enhances internal control standards. Fiscal Crisis & Management Assistance Team

25 CATEGORICAL PROGRAMS AND SPECIAL EDUCATION 17 Staffing ratios must be carefully reviewed and strictly enforced. The district has reduced certificated staff as enrollment declined, but classified positions may not have been adjusted in a timely manner. The district s small and large schools were reported to have similar classified support staff regardless of the enrollment level. Staffing ratios should be reviewed and updated before the budget development cycle begins each year. District staffing ratios for classified staff and for certain certificated positions were established several years ago and have not been adjusted as enrollment has declined at a number of district schools. Interviews with school staff members revealed perceived discrepancies in staffing at schools and a perception that staffing allocations are not changed when enrollment changes. While many schools in the district are declining, several are growing and indicate they have not received additional staff. Involving site administrators will help to create buy-in and a transparency in the staffing allocation process. In creating this process, the district should look at an enrollment-based model as well as considering other unique needs and characteristics of individual schools. Under the current HLPUSD dual computer system and lack of an integrated position control module, positions are entered in payroll and then the budget is projected from payroll data. This creates an internal control weakness since there is no check and balance system that ensures that people being paid are actually filling budgeted and authorized positions. Recommendations The district should: 1. Develop and use a computerized, integrated position control system. 2. Review and revise staffing allocation formulas for classified staff and certain certificated positions to ensure fairness at all sites, whether enrollment is declining or increasing. Categorical Programs and Special Education The district receives considerable state and federal categorical funds that are designated by the granting agency for special projects. At the end of 25-6, the district had over $6 million in unspent carryover categorical funds. Careful planning for the effective use of these funds may help ease the burden on the unrestricted general fund. The recent 26-7 first interim report shows that the restricted ending balance is projected to be the same as the prior year ending balance, indicating that categorical fund expenditures have not been reviewed or planned for use to provide services for students. The study team noted that the district s categorical (CAT) form for 24-5 showed a restricted carryover for home-to-school transportation and special education transportation. This is highly unusual since it would indicate the district incurred no encroachment Hacienda La Puente Unifi ed School District

26 18 CATEGORICAL PROGRAMS AND SPECIAL EDUCATION for transportation in the prior year. The current year s budget showed that only personnel costs were budgeted in the transportation resource code. Expenditures may have been incorrectly coded, causing incorrect information to be entered on state and federal reports. This could result in the district not receiving appropriate funding in future years. The district should carefully review its account code structure for accuracy and make corrections as necessary. The district should also consider refiling certain state and federal reports if revenues and/or expenditures have been reported incorrectly. Categorical funds are an integral part of the district budget. Categorical program development should be integrated with the district s goals and should be used to respond to student needs that cannot be met by unrestricted expenditures. The Superintendent and cabinet should establish procedures to ensure that categorical funds are expended effectively to meet district goals. Carryover and unearned income of categorical programs should be monitored and evaluated in the same manner as general fund unrestricted expenditures. The district has large unexpended carryover balances in numerous categorical programs. The revenues and expenditures for these programs must be reviewed and evaluated in the same manner as unrestricted general fund revenues and expenditures. Plans need to be made to budget categorical funds the district expects to receive early in the budget development cycle. These plans must be consistent with categorical funding guidelines and restrictions. Schools should consider all funding sources when addressing key strategies. Restricted funds should be used first since they are allocated for students in the year they are received. Whenever there is doubt about whether to use unrestricted or restricted funds for an item that can come from either source, restricted funds should be used. Reports of categorical expenditures should be prepared monthly for the Chief Academic Officer and Chief Business Officer. They should review expenditures to date and remaining balances and determine whether any of these funds can be redirected to reduce carryover and unused balances. A review of effective categorical program supervision, delivery and expenditure of funds should be included in evaluating managers with responsibility over these specific funds. The use of AB 825 categorical flexibility provisions as well as flexibility provisions for federal programs should be reviewed to assist in alleviating the district s budget crisis. Interviews with district managers and employees indicated the need for budget training and for improved budget accountability for managers and principals. Principals indicated the desire for training on the use of categorical funds and on how the district and site budgets are developed. Additionally, concerns were expressed that categorical carryover information did not reach school sites until late in the year and then was often revised several times, causing schools to continually update school site plans. As with most districts in California, the cost of Special Education has increased significantly. It was reported that the caseloads of Special Education teachers and staff may need realignment. In small schools the teacher caseloads may be below average. Careful Fiscal Crisis & Management Assistance Team

27 CATEGORICAL PROGRAMS AND SPECIAL EDUCATION 19 review of six-hour special education instructional assistant positions indicates that changing some positions to part-time could reduce costs. Additionally, the district needs to formalize a tracking system to ensure that one-on-one instructional assistants follow the student to whom they are assigned and that the position is eliminated if the student leaves the district or services are no longer required. Recommendations The district should: 1. Set up a training session for school administrators and key staff members on the allowable uses of various categorical funds. 2. Carefully review for accuracy the recording and reporting of transportation program charges to avoid any loss of funding. 3. Consider refiling certain transportation reports if revenues and/or expenditures have been reported incorrectly. 4. Allocate school site carryover to the sites no later than September 3 and work with schools to review these carryover budgets. 5. Engage the instructional department, under the direction of the Chief Academic Officer, to develop and monitor the district s categorical budget. Ensure compliance by having the Chief Academic Officer review and approve personnel and purchase requisitions that are charged to categorical programs. 6. Ensure that the Consolidated Application is developed and reviewed against actual revenue and expenditure transactions in the financial records. 7. Set priorities for the use of categorical funds. Develop plans for the use of carryover funds. 8. Evaluate the caseloads of Special Education staff and reallocate positions or duties if caseloads are below average. 9. Review six-hour Special Education instructional assistant positions to determine if some positions might be converted to part-time status. 1. Ensure that Special Education one-on-one instructional assistants follow the students to whom they are assigned. Hacienda La Puente Unifi ed School District

28 2 CATEGORICAL PROGRAMS AND SPECIAL EDUCATION Fiscal Crisis & Management Assistance Team

29 MULTIYEAR FINANCIAL PROJECTION 21 Multiyear Financial Projection Multiyear financial projections (MYP) are an important part of the overall budget process and a major requirement of the AB12 school district financial oversight legislation. The district is required to submit multiyear projections along with the adopted budget and all interim reports. AB12 requires school districts to be able to meet all financial obligations for the current and two subsequent years. FCMAT noted some inconsistencies in the district-prepared MYP at the time the 26-7 budget was adopted. The independently prepared multiyear projections done by FCMAT in this report include certain corrections and assumptions that differ from those the district used in their original projections. The FCMAT MYP, which was prepared last fall, indicates that the district will be able to meet its obligations in the current and two subsequent years. FCMAT prepared the multiyear financial projections that are in this report. An unrestricted general fund summary appears at the end of this section of the report, and the detailed MYP is attached as Appendix E. After reviewing district records, interviewing employees and examining numerous financial reports to gather pertinent information for the MYP, FCMAT developed certain assumptions that are identified in the MYP narrative. The district has engaged in deficit spending in the past and is likely to continue doing so even though significant budget adjustments were made in 25-6 and 26-7 if the budget is not carefully and frequently monitored. FCMAT s MYP was prepared using the district s 26-7 adopted budget and other financial information but may contain assumptions different from other multiyear projection assumptions prepared by district staff. At this time, based on the 26-7 budget information the district provided to FCMAT, it appears that the district will comply with the AB12 requirements of meeting its financial obligations in the current and two subsequent years. This was determined before the 4% salary increases were awarded. The district met the required 3% reserve for economic uncertainties and ended the 25-6 fiscal year with unrestricted general fund reserves exceeding the projected ending fund balance on the 25-5 third interim report by over $3 million. The unaudited actual financial statements indicated that all of the excess funds have been designated for specific future purposes as identified in Section 5 of the Fiscal Health Risk Analysis included in this report. In 26-7, prior to the 4% increase, salaries and benefits were budgeted at approximately 9% of the district s unrestricted general fund. A cap on the cost of employee health benefits at $9,5 per employee was in effect at the time the FCMAT MYP was prepared. The adopted budget included projected step and column moves for both certificated and classified employees. The ending fund balance of 25-6 included a designation of 2% to offset a potential retroactive pay increase. Hacienda La Puente Unifi ed School District