Sacramento Unified’s Finances Are Deteriorating, Increasing the Likelihood of Insolvency
Sacramento Unified’s costs, such as salaries and benefits, have increased at a rate that has outpaced the ongoing revenue it receives, leading it to project that it will run out of money in fiscal year 2021–22. Since fiscal year 2016–17, Sacramento Unified has fallen short in paying for its expenditures from its revenue. As Figure 2 shows, from fiscal years 2016–17 through 2018–19, its expenditures each year exceeded its revenue by amounts ranging from $9 million to $25.9 million. It used its general fund balance (fund balance) to cover the shortfalls, resulting in its fund balance decreasing from $97.9 million in July 2016 to $70.3 million in June 2019. As of October 2019, Sacramento Unified projected that its general fund expenditures would exceed its revenue from fiscal years 2019–20 through 2021–22 by $77.8 million—which is $7.5 million more than its current fund balance of $70.3 million. Moreover, state law requires the district to maintain a reserve of 2 percent of its general fund expenditures. Taking into consideration that it projects that this required reserve will be $11.6 million in fiscal year 2021–22, Sacramento Unified will face a $19.1 million shortfall at that time.
Sacramento Unified Has Consistently Spent More Than It Received in Revenue Since Fiscal Year 2016–17
Source: Sacramento Unified’s audited financial statements for fiscal years 2013–14 through 2017–18, unaudited actuals for fiscal year 2018–19, and budget documentation for fiscal years 2019–20 through 2021–22.
Note: To better understand Sacramento Unified’s financial condition, the amounts above include only operating revenues and expenditures, as they represent what the district spends to run its schools and the revenue it receives based on the services it provides. We have removed one-time revenues received from the State from the revenues presented. As we discuss later in the report, these one-time funds cannot be expected in future years and should not be relied upon to pay for ongoing costs. We also do not include revenues and expenditures from financing sources, such as transfers from other funds, as they generally do not reflect costs or revenues incurred in the operation of the district.
Sacramento Unified cannot achieve cost savings significant enough to balance its budget without addressing its three largest categories of expenditures: salaries; benefits; and contracts, services, and other operating expenses. Specifically, 80 percent of Sacramento Unified’s fiscal year 2019–20 budgeted expenditures consist of salaries and benefits, as Figure 3 shows. An additional 13 percent of its budgeted expenditures are for contracts, services, and other operating expenditures, which largely consist of special education contracts. To address its ongoing costs related to salaries and benefits, the board voted in February and March 2019 to lay off 12 administrators, 150 teachers, and 157 support staff.
We identify the administrators, teachers, and support staff in terms of the number of full-time equivalents (FTEs) rather than the number of individuals, which might be greater than the number of FTEs. For example, two individuals who worked half-time would be one FTE. Unless we specify otherwise, we describe numbers of employees throughout this report in terms of FTEs.
The district claimed at the time that these reductions would save $7.8 million annually. However, according to the district, it had rescinded more than 130 of these layoffs as of October 2019, calling into question whether it realized the full savings. We discuss Sacramento Unified’s costs related to salaries, benefits, and special education in greater detail in the sections that follow.
Most of Sacramento Unified’s Total Budgeted General Fund Expenditures for Fiscal Year 2019–20 Are for Salaries and Benefits
Source: Sacramento Unified’s fiscal year 2019–20 budget.
* Individuals with teaching certificates, such as district teachers, receive certificated salaries. Certificated employees also include staff who are not teachers but provide direct services to students, such as counselors, nurses, and librarians. Employees without teaching certificates, such as administrators, custodians, and bus drivers, receive classified salaries.
Sacramento Unified’s declining enrollment has also contributed to its precarious financial situation. As we discuss in the Introduction, the State bases each school district’s funding primarily on student attendance. From fiscal years 2013–14 through 2018–19, Sacramento Unified’s enrollment declined by 978 students, or 163 students per year. Based on historical trends, it projects decreases of 378 students per year from fiscal years 2019–20 through 2021–22. A 2013 report from the Boston Consulting Group identifies declining birth rates and shifts to public charter schools as factors that have contributed to shrinking enrollment in urban school districts. The report also notes that classroom costs become harder to manage when enrollment declines because students rarely leave schools in class-size increments. For example, according to a 2018 report from WestEd—a nonprofit educational research organization—a school might lose six students per grade level yet still not be able to decrease the number of teachers it needs.
Because it is consistently spending more than it receives in funding, Sacramento Unified is at risk of needing state assistance. As Figure 4 shows, Sacramento Unified’s deteriorating financial condition has prompted the county office superintendent to intervene repeatedly since August 2018. The multiyear projections that the district prepared in October 2019 indicate that it will largely deplete its general fund in October 2021. If Sacramento Unified cannot meet its financial obligations at that time, it may need to request an emergency loan from the State to remain solvent. If the loan exceeds 200 percent of Sacramento Unified’s required reserve—which will be approximately $23.2 million in fiscal year 2021–22—the county office superintendent will appoint an administrator from a pool identified and vetted by the Fiscal Crisis Management and Assistance Team (FCMAT)—a state-created agency designed to help districts meet and maintain their financial obligations—and agreed to by the state superintendent of public instruction and the chair of the State Board of Education. This action would place the district’s board in an advisory role and replace the superintendent with an administrator.
Sacramento Unified Is Close to Insolvency
Source: State law and letters from the county office superintendent to Sacramento Unified.
* The county and state superintendents must agree to the waiver, after which the county superintendent gains the duties and responsibilities of the budget review committee.
Appointment of an administrator would significantly affect Sacramento Unified’s finances and functions. According to state law, an appointed administrator is responsible for implementing substantial changes in a district’s fiscal policies and practices and revising its educational program to align with realistic income projections. If a district’s financial condition becomes extremely severe, an administrator also has the authority to file for bankruptcy. Such a filing would permit the administrator to take actions that include voiding collective bargaining agreements. Further, when a district must make loan and related interest payments, it has less funding available for students. As a result, it may need to increase class sizes or reduce programs and opportunities for students.
Sacramento Unified’s Costs for Employee Compensation and Special Education Have Increased Dramatically in Recent Years
At the same time that Sacramento Unified’s fund balance and financial condition have declined, it has increased spending for teacher salaries, benefits for all employees, and special education. As of December 2017, Sacramento Unified provided the most generous and expensive employee benefits among nearby school districts. Nonetheless, at that time, it agreed to significant salary increases for its teachers, also making its salaries the highest among nearby districts. In part as a result of this decision, teacher salaries represented 38 percent of Sacramento Unified’s total costs in fiscal year 2018–19, while all employee benefits represented an additional 34 percent. Further, the district lacks policies to guide staff on the types of expenditures that are appropriate for the large portion of its budget that it spends on special education, which could lead to it overpaying for some services. Special education costs, which include expenditures for teacher salaries, employee benefits, and contracted services, represented 21 percent of Sacramento Unified’s total costs in fiscal year 2018–19.
Key Terms From the
2017 Teachers Union Labor Contract
- 7.5 percent in general salary increases.
- 2.5 percent retroactive increase for fiscal year 2016–17.
- 2.5 percent increase in fiscal year 2017–18.
- 2.5 percent increase in fiscal year 2018–19.
- Adjustment of the salary schedule targeting additional pay towards midcareer staff to improve retention and recruitment of experienced teachers.
- Changed required student-to-teacher ratio from 32 to 24 for kindergarten.
- Changed required student-to-teacher ratio from 31 to 24 for grades 1–3.
Source: 2017 teachers union labor contract.
The School Board Approved Salary Increases for Its Teachers That It Could Not Afford Without Making Offsetting Cost Reductions
In December 2017, Sacramento Unified significantly increased its ongoing spending obligations when its school board approved a labor contract with its teachers union that contained significant increases in its salary costs. As the text box shows, the 2017 contract terms included general salary increases and a change to the salary schedule, which Sacramento Unified projects will together result in a 15 percent increase in its salary costs. A salary schedule adjustment changes how much a district pays a teacher based on that teacher’s combination of experience and educational attainment, as we show in Figure 5. In June 2017, Sacramento Unified calculated that a 1 percent increase in salary and statutory benefits—which are benefits that a public school provider must provide according to law, such as employer pension contributions—would cost it about $2.1 million. Based on this calculation, we estimate that when fully implemented in fiscal year 2019–20, the 2017 contract’s salary increases and adjustment to the salary schedule will add about $31 million per year in ongoing spending. This amount represents 5 percent of Sacramento Unified’s total spending.
Example of the Change to the Salary Schedule Under the 2017 Labor Agreement
Source: Sacramento Unified’s salary schedule documentation effective July 1, 2017, and July 1, 2019.
In addition, the agreement solidified the district’s past efforts to reduce its student-to-teacher ratios in grades K–3. Before the agreement, Sacramento Unified’s budgets had included funds to hire additional teachers to reduce K–3 class sizes. The 2017 agreement made those class size reductions mandatory. State law provides additional LCFF funds for the purpose of lowering class sizes in grades K–3.
The increased labor costs to which Sacramento Unified agreed when it approved the 2017 contract are significant, particularly given its declining financial situation. Negotiations for the labor agreement began in October 2016 as the district anticipated expiration of its existing contract with its teachers union in December 2016. Sacramento Unified and the teachers union met at least 22 times from October 2016 through May 2017 but could not reach an agreement. At that time, the teachers union noted that Sacramento Unified’s salaries were lower than nearby districts’ salaries and that it believed that Sacramento Unified could afford the increases it was proposing because the district’s budget documents showed that its fund balance was steadily increasing. However, neither of these assumptions fully and accurately reflected the situation at the time.
Although Sacramento Unified did have lower average salaries than comparable school districts, it also consistently maintained the highest average total compensation per teacher from fiscal years 2013–14 through 2019–20, as we show in Table 1. Specifically, the district’s generous and expensive health insurance benefits exceeded those of other districts both in aggregate and per capita costs in all seven years. For example, Sacramento Unified’s total cost for health and welfare benefits to its teachers in fiscal year 2017–18 exceeded Elk Grove Unified’s costs that year by about $13 million, even though Elk Grove Unified employed 950 more teachers. Sacramento Unified’s generous benefits have driven the district’s high total compensation costs, even when the salaries it offered were lower than those of comparable districts. We discuss Sacramento Unified’s health benefit costs further in a later section.
|Elk Grove Unified||$71,340||$73,322||$76,341||$78,663||$80,261||$88,445||$85,058|
|San Juan Unified||$71,583||$74,317||$75,808||$76,908||$76,673||$82,211||$84,433|
|Twin Rivers Unified||$71,162||$71,399||$73,962||$74,625||$76,166||$87,847||$88,250|
|Average Total Compensation†|
|Elk Grove Unified||$82,826||$84,775||$88,087||$91,183||$91,568||$100,121||$96,906|
|San Juan Unified||$83,468||$85,838||$89,674||$91,613||$90,789||$95,856||$99,080|
|Twin Rivers Unified||$78,714||$76,001||$79,716||$81,401||$83,323||$96,146||$98,266|
Source: California Department of Education certificated salary and benefits data from fiscal years 2013–14 through 2017–18 and district budgets for salary and benefits data from fiscal years 2018–19 through 2019–20.
■= Highest in category
■= Lowest in category
Note: Sacramento Unified’s amounts have been updated to reflect increases from the 2017 labor contract.
* Sacramento Unified’s average salary declined slightly in fiscal year 2017–18 because the teachers that it employed had relatively less experience in fiscal year 2017–18 than fiscal year 2016–17 and thus received lower salaries.
† Average total compensation includes salary plus health and welfare benefits. It does not include a district’s costs to provide statutory benefits, such as pension and Medicare.
Additionally, Sacramento Unified may have appeared to be in a better financial condition than it actually was at the time of the 2017 labor negotiations, in part, because it had received one-time funds from the State that contributed to its rising fund balance. From fiscal years 2013–14 through 2017–18, Sacramento Unified received between $1.7 million and $20.6 million annually in one-time funds. The Legislature appropriates one-time funds for a specific purpose and for a limited term, and subsequent legislation is necessary to renew them. Thus, such funds are fundamentally different from funds that districts generally use for ongoing costs, which consist of appropriations for the same purpose that are funded on an annual basis or continuously appropriated funds that are appropriated from year to year without the need for further authorization from the Legislature. For example, in fiscal year 2017–18, Sacramento Unified received $5.7 million in one-time funds from the State for the purpose of satisfying potential outstanding state mandate claims. From fiscal years 2013–14 through 2015–16, such one-time funds helped Sacramento Unified to increase its fund balance. However, that fund balance began declining beginning in fiscal year 2016–17, as Figure 6 shows, because of the district’s increasing expenditures.
Sacramento Unified’s Available General Fund Balance Has Declined Since Fiscal Year 2016–17
Source: Sate law, Sacramento Unified’s audited financial statements for fiscal years 2013–14 through 2017–18, unaudited expenditures for fiscal year 2018–19, and budget documentation for fiscal years 2019–20 through 2021–22.
* The general fund balance is presented without restricted revenue. Restricted revenue is revenue that is subject to externally imposed or legally enforceable constraints by external resource providers, through constitutional provisions, or through enabling legislation.
When Sacramento Unified’s current superintendent joined the district in July 2017, the district and its teachers union still had not reached an agreement on salary despite negotiating for nearly a year. In November 2017, Sacramento Unified made a proposal to the teachers union that included a 6.5 percent salary increase and a 2.5 percent salary schedule adjustment over the three-year term of the contract.The teachers union, stating that the agreement was not fair, voted to strike. As the parties reached a final impasse in negotiations, the superintendent met with the union later in November 2017 and brokered the 2017 labor agreement, which provided significantly higher increases than the district’s previous November 2017 proposal. According to the superintendent, he agreed to the higher increases because he wanted to avert the negative impact an impending strike would have on students and families. Further, based on his conversations with the district’s chief business officer at the time, he believed the district could afford the salary increases.
Although Sacramento Unified believed that it could afford the agreement, the county office superintendent warned the district that it could not. At the Sacramento Unified board meeting to approve the labor agreement in December 2017, the county office superintendent told the board that the district could not afford the agreement without reducing its budget by $15.6 million. Further, in his comments at that meeting and in a letter he sent to the district on the same day, he explained that the $15.6 million in budget reductions would allow Sacramento Unified to meet its minimum reserve requirements through fiscal year 2019–20 but would not eliminate its ongoing structural deficit. He emphasized that without making reductions to its ongoing spending, Sacramento Unified could not afford the agreement based on its own financial projections. He further stated that if the board decided to approve the labor agreement, he would request that the board approve a budget reduction proposal within a month.
However, the board unanimously approved the agreement during the meeting but did not subsequently submit a corresponding budget reduction proposal. According to two board members, the board approved the agreement because it believed that Sacramento Unified would be able to meet its financial obligations based on information from the district’s chief business officer at the time. However, Sacramento Unified’s fiscal year 2017–18 first interim financial report, which the then-chief business officer submitted to the board for approval at the same meeting, noted that under current projections, the district would exhaust its fund balance and need to make budget adjustments for fiscal years 2018–19 and 2019–20. Nevertheless, rather than submitting a budget reduction proposal, the board chose to rely on one-time funds it anticipated from the proposed January 2018 Governor’s Budget to pay for the ongoing salary increases. It did not propose a plan for covering these ongoing costs in subsequent years.
When it approved the 2017 labor contract without making reductions to ongoing spending, the board failed to uphold its fiduciary duty to ensure that the district is able to meet its financial obligations. In his review of Sacramento Unified’s first interim financial report in January 2018, the county office superintendent told the district that using one-time funds to pay for ongoing expenses was a poor business practice. However, because Sacramento Unified projected that it could meet its financial obligations in the current and subsequent fiscal year, the county office superintendent could not compel the district to make cuts instead of using the one-time funds.
In addition to the expected cost increases we describe above, ambiguity in the 2017 contract has resulted in Sacramento Unified facing even greater costs. The contract included a clause that limited the increase in costs from the salary schedule adjustment to 3.5 percent of its teachers’ salary costs. Sacramento Unified believed that the wording of this clause meant that the salary schedule adjustment was capped at a 3.5 percent increase in its annual teacher salary costs. In its review of the district’s financial disclosure of the contract, the county office superintendent reached the same conclusion. However, in September 2018, the teachers union disputed this interpretation, claiming that the 3.5 percent cap applied to fiscal year 2018–19 only, with no cap for the salary schedule adjustment in subsequent years. In May 2019, an arbitrator agreed with the teachers union’s interpretation that the cap applied to fiscal year 2018–19 only.
Therefore, the contract requires that salaries in fiscal year 2019–20 increase according to the salary schedule without a cap. As a result, Sacramento Unified has had to budget an additional 4 percent of its annual teacher salary costs to implement the salary schedule adjustment, for a total increase of 7.5 percent in annual teacher salary costs. In an October 2019 letter from Sacramento Unified to the teachers union president, the district stated that it had fully implemented the new salary schedule for fiscal year 2019–20. It further explained that it had already paid the first of two retroactive payments for fiscal year 2018–19, and that it anticipates making the second payment in November 2019.
The board approved the contract despite the ambiguity in its terms. The board could have mitigated the risk of adding these significant ongoing spending obligations to the district’s increasingly risky financial situation if it had certified the district’s ability to meet the costs of the labor agreement before approving it. If such a requirement existed, it might have inquired further into the financial impact of the labor agreement. Although state law requires a school district’s superintendent and chief business officer to publicly disclose the costs associated with labor contracts and certify that the school district can afford the cost of the contracts, it does not require its board to certify that the district can afford the costs of the agreement.
Sacramento Unified’s Spending on Employee Benefits Has Increased Significantly Since Fiscal Year 2013–14
Employee benefits are another growing area of costs for Sacramento Unified. Employee benefits primarily consist of health care benefits and pension benefits for both current and retired employees. From fiscal years 2013–14 through 2017–18, the cost of these benefits increased from $106 million to $160.8 million, or 52 percent. As of fiscal year 2017–18, employee benefits represented 31 percent of the district’s total expenses. Although Sacramento Unified has a limited ability to control pension costs for its employees because state law establishes the rates it contributes, it has failed to address its high health care costs.
Top Five Costliest California School District
Health Plans in 2018
The following identifies the annual cost to a district for an employee family plan:
- $37,971 - Sequoia Union High (San Mateo County)
- $35,694 - Saratoga Union Elementary (Santa Clara County)
- $35,052 - East Side Union High (Santa Clara County)
- $34,697 - Sacramento Unified (Sacramento County) (HealthNet)
- $30,324 - Saddleback Valley Unified (Orange County)
Source: California Department of Education’s 2018 form J-90 data report.
As we indicate previously, Sacramento Unified offers its teachers generous and costly health care benefits. In fact, as the text box demonstrates, one of the plans Sacramento Unified offers is among the costliest in the State. From fiscal years 2013–14 through 2017–18, the district’s health care costs grew from $60.5 million to $72.7 million, an increase of 20 percent, with $10.5 million of the increase related specifically to benefits it provided for its teachers. Sacramento Unified offers two health plan options to its teachers and pays the full cost of either plan for employees and their families. In comparison, other nearby districts generally limit the amount that they pay to the cost of the least expensive plan, pay the full cost only for employees, or cover only 80 percent of the least expensive health plan’s costs for employees and their families. As a result, as Table 2 shows, Sacramento Unified consistently spent more than other nearby districts on health care benefits both per employee in general and per teacher specifically.
|Elk Grove Unified||9.4||10.9||10.5||11.1||10.0||11.2||10.0||12.4||9.3||10.9|
|San Juan Unified||8.2||8.8||9.2||8.9||9.3||10.9||9.8||11.4||10.4||11.0|
|Twin Rivers Unified||6.8||5.1||6.2||2.8||6.2||4.1||6.0||5.1||6.3||5.1|
Source: Education Data Partnership district profile information and budget documentation for the Sacramento, Elk Grove, San Juan, Stockton, and Twin Rivers unified school districts.
■= Highest in category
■= Lowest in category
Since 2003 Sacramento Unified has received repeated warnings about the affordability of paying the full cost for all health plans it offers to its teachers. Nonetheless, it did not include a limit on its contributions to health benefits for employees and their families in any of the six contracts it negotiated with its teachers union during these years. The chairperson of a fact-finding panel that reviewed Sacramento Unified’s compensation and employee benefits in 2003 identified the district’s high health care costs as an area of concern and recommended that it impose a cap on the amount of health benefits it would pay, using the cost of its Kaiser Permanente premium to set the cap because that plan was the less expensive of the two plans the district offered. In a 2006 fiscal review, FCMAT repeated this recommendation to Sacramento Unified, recommending that the district negotiate a cap on health benefit plans with its collective bargaining units. The district followed neither recommendation. However, the district’s current leaders note that the district’s current contract proposal to the teachers union includes capping the amount the district pays for health care. We discuss the district’s contract proposals in a later section.
Further, Sacramento Unified has not taken sufficient action to control its increasing liability for retiree health benefit obligations. The district offers health care benefits to retired employees who meet certain criteria—such as years of service—that vary depending on when the employees retire and whether they are over age 65 at retirement. In particular, retired teachers union members continue to receive fully paid health care benefits until 65 and then receive a managed Medicare benefit. Other nearby districts typically pay only the cost of the lowest cost plan they offer for retired employees who have not yet transitioned to Medicare.
Sacramento Unified’s contributions toward its retiree health benefit obligations ranged from a low of $19.3 million to a high of $45.4 million annually from fiscal years 2013–14 through 2017–18. Those contributions fully covered the cost of current retirees’ health care benefits. However, the contributions did not cover the full cost of the retiree health benefits the district has promised employees who have yet to retire; instead they covered only a portion of this cost. As Figure 7 shows, Sacramento Unified should have contributed $41.8 million in fiscal year 2017–18 towards retiree health benefits for current and future retirees; instead it contributed only $33.1 million, thus increasing the amount it will have to contribute for future retirees. As its liability increases, so too does the minimum amount it has to contribute each year. Sacramento Unified’s retiree health benefit liability—the amount it projects it will have to contribute for these benefits in the future—totaled $726 million as of fiscal year 2017–18, or 140 percent of its total general fund spending that year.
Sacramento Unified’s Retiree Health Benefit Liability Grew in Fiscal Year 2017–18, in Part, Because of Its Limited Contributions Toward Retiree Health Benefits
Source: Sacramento Unified’s Government Accounting Standards Board 75 Actuarial Report of Other Post Employment Benefits Liabilities for fiscal year end June 30, 2018 Financial Report, and Sacramento Unified’s audited financial statements for fiscal year 2017–18.
* Retiree health benefit cost is the amount Sacramento Unified’s actuary determined the district needs to contribute to fund benefits over time and is greater than the amount needed to cover only current retirees’ health benefits. If the district does not make the full contribution, interest accrues on the unpaid portion.
Despite receiving repeated warnings from external parties, Sacramento Unified has failed to formulate a plan to address its growing liability for these retiree health benefit costs. Since 2007 the county office superintendent has sent at least 24 letters to Sacramento Unified asking it to submit a plan explaining how it will pay for its unfunded retiree health benefit obligations. However, according to the county office superintendent, the district had failed to do so as of August 2019. Similarly, in 2010 the Sacramento County Grand Jury recommended that school district boards in the county find a way to pay for their retiree health benefits without relying so heavily on their general funds and that they negotiate with their employee unions to reduce benefits or increase employee contributions. In its response to the grand jury report, Sacramento Unified noted that it had recently reached an agreement with its teachers union that extended the vesting period to qualify for retiree health benefits and called for employee contributions toward the cost of retiree health care of $15 per month in fiscal year 2010–11 and $20 per month beginning in fiscal year 2011–12. However, the fact that its liability continued to grow from fiscal years 2013–14 through 2017–18 demonstrates the inadequacy of these steps.
Further, Sacramento Unified’s decision to enter its 2017 labor contract further increased its burden related to retiree health care costs. Specifically, the district agreed to a provision that increased its contributions by an additional 1.5 percent of total bargaining unit payroll, or about $3 million in fiscal year 2018–19. However, teacher contributions towards the cost of retiree health benefits are currently $20 per month. We find the district’s continued unwillingness to require its employees to contribute more to retiree health benefits puzzling given the fact that its unfunded liability for these benefits increased by nearly $166 million from 2008 through 2018.
Finally, the 2017 labor contract has also affected Sacramento Unified’s pension costs. State law establishes mandatory California State Teachers’ Retirement System (CalSTRS) contributions for employers and employees, requiring incremental increases of employers’ contributions up to 10.85 percent of teachers’ salaries from fiscal years 2014–15 through 2020–21. In part because of these incremental increases, Sacramento Unified’s annual contribution to CalSTRS increased by $15.2 million from fiscal years 2013–14 through 2017–18, to a total of $29.2 million. Although this growth to date has been largely outside of the district’s control, the 2017 contract will result in even higher pension costs. Specifically, because state law bases CalSTRS contributions on teachers’ salaries, the salary increases in the 2017 contract will increase the amount Sacramento Unified must contribute toward teacher pensions. When it approved the contract, Sacramento Unified projected that the salary increases would increase its pension costs by $2 million annually beginning in fiscal year 2018–19, an additional expense the district can ill afford.
Sacramento Unified Has Not Taken Sufficient Action to Ensure That Its Special Education Costs Are Reasonable
Sacramento Unified has done little to control special education costs or seek additional revenue available for special education. Special education represented 21 percent of the district’s total spending for fiscal year 2017–18. It has done little to control these costs even though its special education expenditures increased by 31 percent—or $26.1 million—from fiscal years 2013–14 through 2017–18, accounting for 20 percent of the overall increase in its spending during this period.
Sacramento Unified’s close tracking and monitoring of its special education costs is particularly important because its overall decline in enrollment has limited the funding it receives for special education services. State law bases funding for special education on a district’s average daily attendance, not its number of students enrolled who receive special education services. From fiscal years 2013–14 through 2017–18, Sacramento Unified’s overall attendance declined by 2 percent, and it consequently lost nearly $700,000 in state and federal funding for special education. During this same period, the number of Sacramento Unified’s students who received special education services increased by 7 percent and its general fund expenditures for special education increased by 56 percent, or $25.8 million. As Figure 8 shows, Sacramento Unified projects that its general fund spending for special education will nearly double by fiscal year 2019–20 from what it spent in fiscal year 2013–14.
From Fiscal Years 2013–14 Through 2019–20, Sacramento Unified’s General Fund Spending for Special Education Is Projected to Almost Double
Source: Sacramento Unified’s accounting system.
Because special education spending represents such a large portion of Sacramento Unified’s costs, we expected that it would have taken steps to maximize the value of its spending. State law requires the district to provide an education to students receiving special education services at no cost to their families. Sacramento Unified also has a responsibility to use its limited funds in an efficient and effective manner. However, it has no written policies guiding staff on identifying cost-effective approaches for providing special education services. A failure to have clear policies in this area could lead to Sacramento Unified overpaying for some services. For example, the largest area of increase in its special education costs comes from contracts for specialized services, such as speech therapy. However, the district does not have policies requiring staff to analyze the value of those contracts and determine whether it would benefit from consolidating providers.
When we looked at Sacramento Unified’s use of costly residential treatment programs for students receiving special education services, we identified a similar lack of adequate policies. Residential treatment programs involve students living at facilities where they receive special education and related services. These facilities may be in California, but they may also be in other states, depending on the needs of the students. However, Sacramento Unified has not adequately documented its efforts to ensure the residential treatment programs it uses are cost-effective. Specifically, state law requires the district to document its efforts to locate an appropriate residential treatment program within the State before sending a student out of state. Using in-state programs may reduce travel costs and keep children closer to their families. Sacramento Unified must report on its efforts to place students to the California Department of Education and include the costs of the special education that out-of-state facilities provide. However, we found that Sacramento Unified’s documentation contained minimal analysis. In fact, in one case, it was evident that the district had copied language for this analysis from a prior form, as the analysis listed a different child’s name. Further, although the district prepared the documentation, the California Department of Education confirmed that Sacramento Unified had not actually submitted this required documentation to it.
Finally, despite a decline in its funding for special education, Sacramento Unified has not applied for all the special education funding available to it. Specifically, the State reimburses entities for extraordinary costs of special education placements and has set aside $3 million annually for this purpose. Although Sacramento Unified has had 12 or fewer students per year requiring such placements since fiscal year 2013–14, these placements have cost an average of more than $100,000 per year per student. According to the special education director at the district, it has not applied for the available funding because the State caps the total reimbursement amount it will pay statewide. However, we calculated that Sacramento Unified could have been eligible for up to $1.4 million in reimbursements during the five-year period we reviewed. After we brought this issue to the district’s attention, in November 2019, the district applied for reimbursement for three placements from fiscal year 2018–19 that could result in about $273,000 in additional funds. Considering its deteriorating financial situation, Sacramento Unified cannot afford to fail to request any funding that may be available to it.
Sacramento Unified hopes to reduce its special education costs through early intervention, but its efforts are unlikely to have immediate effect on its current financial crisis. According to the district superintendent, increasing efforts to promptly identify students who may require special education services and providing early intervention could deter the classification of students as having special needs. However, increasing the intervention services Sacramento Unified provides will not reduce the number of students to whom it currently provides special education services; thus, it will not realize any immediate cost savings.
Sacramento Unified Lacks Consistent Leadership and Adequate Budget Policies, Limiting Its Ability to Effectively Manage Its Finances
Sacramento Unified has not taken adequate steps to address the organizational issues, such as management turnover, that are limiting its ability to make viable strategic decisions and to manage its finances effectively. According to board leaders, the district’s high turnover in key management positions over the last six years has affected its ability to make progress in addressing its financial condition. For example, as we discuss in an earlier section, the district has failed to implement changes to its health care costs despite repeated warnings. When key leaders change, established policies can provide guidance to staff in the interim; however, Sacramento Unified lacks such policies. Without consistent leadership and guidance, the district will likely struggle to make the difficult organizational decisions necessary to address its systemic financial problems.
Sacramento Unified has experienced significant turnover of its key leaders and has not used strategies that would help mitigate such turnover. It hired its current superintendent in July 2017, and the former superintendent served for less than three years. During the current superintendent’s tenure, Sacramento Unified has had three chief business officers, with the current one hired in September 2019. From April 2019 through September 2019, the district paid a financial consultant to fill a role similar to that of chief business officer. In comparison, most of the other school districts we reviewed have had only one or two superintendents and chief business officers during the past five years.
To address its high turnover, we expected that Sacramento Unified would have developed a succession plan or other strategies; however, that was not the case. A succession plan helps to ensure that an agency has a talented and competent workforce and that the agency can mitigate the loss of institutional knowledge when it experiences attrition. The U.S. Office of Personnel Management suggests that as part of a succession plan, an agency should develop orientation and mentorship programs that help adapt individuals to its culture. According to Sacramento Unified’s chief human resources officer—who is one of its few long-tenured, executive-level staff—the district could increase its retention of key management by improving its onboarding process. For example, to better transition individuals into its culture, Sacramento Unified should, when possible, provide time for new managers to work with the managers whom they are replacing. However, Sacramento Unified has not used a succession plan or mentorship programs to address its turnover. Further, a board member stated that past boards were not clear on their goals, in one case hiring a superintendent who may not have intended to stay long term.
Sacramento Unified’s failure to create and maintain comprehensive budget policies and procedures has exacerbated the problems resulting from its lack of consistent leadership and has contributed to its inability to manage its growing costs effectively. The Government Finance Officers Association recommends that school districts go through certain steps in their budgeting process, such as developing policies for long-term forecasting and using performance measures to assess how well services are executed. Sacramento Unified has a district budget procedure, a board budget policy, and a board administrative regulation on budget development. However, these documents provide only broad guidance for developing budgets. Specifically, they state that the district shall prepare its budget annually using the best possible estimates that individual schools and administrative staff can provide, that the district shall develop its budget in accordance with standards and criteria for fiscal accountability adopted by the State Board of Education, and that it will use a series of budget assumptions to project the budget. They do not provide details regarding how Sacramento Unified will perform each of these steps, including the reasoning and key assumptions the district will use when making its budget decisions and developing its multiyear projections. For example, in its fiscal year 2019–20 budget, Sacramento Unified included contract savings of $485,000 from services not needed, but it did not describe what those services were and why they are no longer necessary.
Because Sacramento Unified’s broad policies provide only high-level guidance, we asked the individual who served as the district’s budget director until July 2019 to provide a description of its budget development practices. As of October 2019, Sacramento Unified did not have a budget manager. According to the former budget manager, its practices include estimating revenue based on attendance and performing a staffing analysis at each school site to determine the necessary number of teachers. She further stated that Sacramento Unified’s cabinet, composed of its executive management, also makes budget recommendations, which are subject to board approval. In a December 2018 fiscal health risk analysis of the district, FCMAT identified the inadequacies in Sacramento Unified’s budget practices. Specifically, it noted that the district needed to develop a comprehensive budget development process to ensure its management understands all revenues and expenditures and that they direct expenditures to support the district’s goals and objectives.
Because Sacramento Unified has not developed guidance regarding the need to document its reasoning and key assumptions for its budget decisions, it lacks a starting point for explaining to the public the differences between its budgets and its spending. In reviewing its budgets, we observed large variances in its budgeted and reported actual revenues and expenditures. For example, in fiscal year 2017–18, Sacramento Unified reported it spent $16 million, or 64 percent, more on contracted services than it budgeted. We expected that Sacramento Unified would have investigated such variances and incorporated its findings into its budgetary guidance to increase the accuracy of its future revenue and expenditure projections. However, it did not do so, likely in part because it has no procedures requiring staff to determine the causes of large variances. Moreover, it could not provide explanations for many of the variances we identified, further demonstrating its lack of a thorough budget process. If its budget projections are not accurate, Sacramento Unified risks spending more than expected and reaching fiscal insolvency sooner than its current projection. Further, its ability to explain significant variations is critical to ensuring the public’s confidence in its projections.
In fact, Sacramento Unified has been unable to provide documentation of the rationale it used to develop many of the revenue and expenditure estimates in its three-year projections. State law requires districts to use a standardized form to submit their budgets to allow for ease of comparison. The form includes a three-year financial projection and asks for the disclosure of assumptions used to determine the projections for the two subsequent fiscal years. For example, the user guide for the standardized form states that districts should identify any significant cost increases that will impact their budgets. Although the district anticipates a $3.9 million cost increase for books and supplies from fiscal years 2019–20 through 2020–21, it did not identify this increase in its budget assumptions. The district hired a consultant in April 2019 that helped develop its multiyear projections for fiscal years 2019–20 to 2021–22, which the board adopted in October 2019. However, it still has not publicly disclosed many of the assumptions it used to develop the projections. Sacramento Unified’s current chief business officer started in September 2019, and the district superintendent stated that he expects she will implement improved policies and procedures for budget development. Without adequate policies and procedures to inform the accuracy of its estimates of revenue and expenditures, the district cannot effectively plan for its future.
Sacramento Unified’s lack of a documented methodology and key assumptions explaining its rationale for its multiyear projections is particularly troubling because flawed assumptions could mean it may become insolvent sooner than it expects. Its current three-year projection for fiscal years 2019–20 through 2021–22 indicates that it will largely deplete its general fund in October 2021 and become insolvent in fiscal year 2021–22. However, subsequent events have called that prediction into question. According to a consultant at Sacramento Unified, the district incorporated into its projection salary increases from the May 2019 arbitration we discuss in an earlier section. However, she stated that the district’s salary costs may still increase as a result of late hires and corrections in individual employees’ pay based on their experience and education. These increases in expenditures may move forward the date by which Sacramento Unified becomes insolvent.
Sacramento Unified typically creates its multiyear projections as part of its budget in June, and it updates them when it submits interim financial reports in December, March, and May. However, because the pending insolvency has such a large potential impact on the district, Sacramento Unified should update its multiyear projections when significant events occur, like the May 2019 arbitration results. Such updates will enable it to improve its financial planning and to provide better information to the public about its financial situation.
Consistent leadership and clear budget policies could also help Sacramento Unified to effectively use one-time funds. As we discuss in an earlier section, the Legislature appropriates these funds for a specific purpose and for a limited term, and they require subsequent legislation for their renewal. Thus, districts cannot anticipate receiving these funds in future years. However, Sacramento Unified used one-time funds from fiscal years 2016–17 through 2018–19 to pay for ongoing costs. By relying on one-time funds to pay for ongoing expenditures, the district risks being unable to pay for such costs if these funds are not available in the future. For example, the district received $7.1 million in one-time funds from the State in fiscal year 2018–19 that were designated for the professional development of teachers, among other uses. However, according to its budget, the district did not receive these funds in fiscal year 2019–20.
Further, in violation of state law, Sacramento Unified frequently failed to disclose its use of one-time funds. State law requires districts to disclose in their budgets if they intend to use one-time funds to pay for ongoing general fund expenditures in excess of 1 percent of their total general fund expenditures. Sacramento Unified used one-time funding in excess of 1 percent of its general fund expenditures in each year from fiscal years 2015–16 through 2018–19. However, it disclosed its use of one-time funds in only one year, fiscal year 2018–19. By not disclosing its use of one-time funds, Sacramento Unified has not ensured that its stakeholders are fully aware of the degree to which it has relied on these funds to pay for its ongoing expenses.
We asked the district superintendent why Sacramento Unified frequently used one-time funds to pay for ongoing expenditures and why it did not disclose their use in its annual budgets. He stated that former superintendents and budget officers might have decided to use one-time funds for ongoing expenses because of a variety of factors; however, he acknowledged that this was not a best practice. He also stated that going forward, he intends to avoid funding ongoing expenditures with one-time revenues.
The Current Proposals From Sacramento Unified and Its Teachers Union Are Unlikely to Resolve the District’s Financial Crisis
Because Sacramento Unified agreed to significant salary increases in its 2017 contract with the teachers union and failed to adequately control its rising health care and retiree benefit costs through negotiations, it must now make more dramatic budget reductions to establish and maintain fiscal solvency. The district has recently made some reductions to its ongoing spending that are not dependent on negotiations, such as layoffs of administrators and teachers in excess of required student-to-teacher ratios. However, it is unlikely that it will be able to resolve its current difficulties without negotiating with its labor partners. In fact, according to Sacramento Unified’s superintendent and board president, it cannot make budget reductions independently of labor negotiations without a catastrophic negative impact on students.
Sacramento Unified’s options for reducing ongoing expenses without engaging in labor negotiations are limited and unlikely to prove successful in addressing its precarious financial situation. For example, it could close schools and remove bus routes. However, if it closes a school, it may lose students—and the revenue associated with those students—either to other districts or to a charter school that could begin operating in the school’s facilities. In 2013 Sacramento Unified conducted an analysis of the fiscal impacts of closing 11 schools and found that it would only save the district approximately $2.5 million per year, or about $230,000 per school. Moreover, according to Sacramento Unified, 78 of its 91 bus routes serve students who receive special education services, while it maintains some of the other 13 routes because of safety concerns, such as crossing railroad tracks. As a result, closing schools and removing bus routes are unlikely to generate the savings needed to resolve Sacramento Unified’s financial problems and could create new problems for students and their families.
Because it lacks other options, it is imperative that Sacramento Unified and its teachers union work together to agree to a solution, which they have not yet done. The teachers union and Sacramento Unified have each recently made proposals regarding the district’s budget; however, these proposals have limitations and are unlikely to fully address the district’s financial problems. In June 2019, the teachers union offered a proposal that included suggestions to stabilize Sacramento Unified’s fiscal status. However, these suggestions would not resolve the district’s long-term fiscal problems, and some would worsen the current deficit. For example, the union suggests rescinding layoffs of teachers, as well as certain classified staff. Doing so would result in dramatic increases in the district’s ongoing spending—in this case, an estimated increase of about $14 million in its ongoing expenditures beginning in fiscal year 2019–20.
Further, the teachers union suggested adopting the nonbinding class size reduction goals for grades 4 to 12 included in the 2017 contract. As Table 3 shows, if Sacramento Unified were to hire additional certificated staff and rehired laid-off teachers to achieve the staffing goals the union proposed, it would add at least another $26.9 million in ongoing spending starting in fiscal year 2019–20. In total, implementing the union’s staffing proposals would increase ongoing district expenditures by at least $36.7 million—the cost of hiring the additional staff to meet the class size reduction goals plus rehiring classified staff not covered by the class size goals.
|ADDITIONAL TEACHERS REQUIRED
(FULL TIME EQUIVALENTS)
|COST OF THE CHANGE
|9–12: English, Math, Social Science, and Science||35:1||28:1||43.16||3.6|
|9–12: All other subjects||32:1||35:1||(14.16)||(1.2)|
|Special Day Class: Elementary—Mild to Moderate Needs*||15:1||12:1||3.65†||1.6|
|Special Day Class: Elementary—Moderate to Severe Needs*||13:1||8:1|
|Special Day Class: Secondary*||16:1||12:1||15.23|
|School Nurses||35.00 FTEs||750:1||19.21||1.6|
|Librarians||11.60 FTEs||One for every secondary school except opportunity schools||7.40||0.6|
|Psychologists||None||1,000:1; no more than two schools per psychologist||7.50||0.8|
|Behavioral Specialists||None||No more than five schools per specialist||9.60||0.8|
Source: June 2019 teachers union budget proposal and previous teachers union bargaining agreements.
Note: For the purposes of calculating the cost of the increased staffing, we assumed Sacramento Unified would need to hire the full number of teachers between the current and proposed requirements and that the newly hired staff would be at the lowest salary amount.
* Special day classes provide services to students with more intensive needs whose individual education plans require attendance in special education for the majority of the school day. The students are grouped according to similar instructional needs.
† The additional teachers for elementary special day classes were all calculated at the mild/moderate needs rate.
The teachers union proposal contains other suggestions that could result in some level of savings but are unlikely to be viable in the long term. For example, the union proposed reducing Sacramento Unified’s contributions to retiree health benefit liabilities to only the amount due in the current year. We estimate this would result in savings of about $7 million from fiscal years 2019–20 through 2021–22—considerably less than the $25.5 million over the same period the teachers union asserted in its proposal because the union appears to have used outdated information for its calculations. Because Sacramento Unified expects the annual cost of retiree health benefits to increase over the next several years, the amount of savings generated from this proposal would diminish over time. Moreover, decreasing the amount of its contributions toward retiree health benefits in the short term would increase the amount Sacramento Unified would need to contribute over the long term, making this a poor option for resolving its ongoing budget problems.
We identified concerns with many of the teachers union’s other suggestions as well. For example, it suggested reducing pay by 20 percent for those administrators with annual salaries exceeding $120,000. We estimate that this change, including a 20 percent reduction in the superintendent’s salary, could save Sacramento Unified about $3 million annually, including decreased district contributions toward employee pensions. However, the superintendent stated that he believes such a change may cause employee retention problems. In addition, most of the district administrators with salaries exceeding $120,000 are represented by United Professional Educators, Sacramento Unified’s labor union for certificated management staff. The district would need to negotiate any salary reductions for those employees with their labor union. If one removes represented employees from the calculation above, the union’s suggestion would only result in about $1 million in annual ongoing savings.
Another suggestion by the teachers union might result in savings but involves a greater amount of uncertainty. Specifically, the union suggested reducing contract expenditures by 10 percent, which we estimate could result in savings of $5 million annually. However, it is unclear whether Sacramento Unified would be able to reduce its contract expenditures by that amount, in part because nearly half of its contracts are for special education services. Although the district has some discretion as to how and where it provides such services, it must provide appropriate facilities, education, or designated instruction and services required by students with exceptional needs, and it may contract with agencies to provide these services when no appropriate public option is available. In addition, reducing its contract services might require Sacramento Unified to hire additional staff to provide the contracted services, potentially further increasing costs.
It is also unclear whether Sacramento Unified could reduce its other contract expenses by 10 percent. In fiscal year 2019–20, it budgeted about $26 million for services and other operating expenditures. About 40 percent of those costs are for essentials like water and electricity. Although the teachers union’s suggestion specifically mentions outside legal expenses, Sacramento Unified budgeted about $3 million for this type of service. If it were to cut these legal expenditures by 10 percent, it would save only about $300,000 annually.
Sacramento Unified made an initial proposal in August 2019 to its teachers union that could result in significant savings, but its suggested actions would require significant concessions from the union. For example, the district suggested capping the amount it pays towards health benefits for employee-only plans at the rate of the lowest-cost health plan and capping contributions for employee-plus-one and family plans at 75 percent of the lowest cost plan rate. This suggestion would cause Sacramento Unified’s teachers to contribute an amount similar to the amounts teachers contribute at nearby districts, which generally cover between 75 percent to 85 percent of the lowest-cost employee-plus-one plans and 75 percent to 80 percent of the lowest-cost family plans. We estimate that implementing this change could result in $15.7 million in annual savings.
Sacramento Unified also suggested that teachers union members increase their monthly contributions to the cost of their future retiree health benefits. However, unless the district reduces the amount it contributes in accordance with the amount of increased employee contributions, this proposal would not result in short-term savings. If Sacramento Unified did reduce its contributions by the total amount of increased employee contributions, this change would result in immediate savings but would be unlikely to decrease its growing liability for retiree healthcare costs.
Both of Sacramento Unified’s suggestions require negotiations with its teachers union. The 2017 labor agreement we discuss in an earlier section expired in June 2019. From November 2018 through October 2019, Sacramento Unified sent 16 letters to the teachers union requesting a first meeting to negotiate a successor contract; however, as of October 2019, the union had refused to meet. The county office superintendent also noted that the union has not agreed to collaborate or come to the bargaining table to discuss the district’s proposals and indicated that the hostile relationship between the union and the district has impeded progress in making the district into a strong, high-functioning organization. However, the teachers union has raised a number of concerns it wants the district to address before beginning negotiations, including staffing concerns and payments related to the 2017 labor agreement. The union has asserted that Sacramento Unified should not expect to negotiate a new agreement when it has not fulfilled its obligations according to the last agreement. As we discuss in an earlier section, the district has stated that it will make outstanding payments for the salary schedule adjustment in November 2019.
Ultimately, the district is responsible for finding a way to work with its teachers union to maintain ongoing fiscal solvency. However, if Sacramento Unified cannot obtain concessions, it may need to take unilateral action to avoid insolvency. State law allows a public school employer to unilaterally implement the last offer made to its union upon reaching an impasse if Employment Relations declares that the parties are at impasse following good-faith efforts to negotiate. However, once an impasse is declared, a union also gains the right to strike if a district attempts to impose terms of employment. Because the length of negotiations can vary, it is not clear when Sacramento Unified would need to impose those terms to avoid insolvency.
Unless Sacramento Unified Acts Quickly, It Is Unlikely to Resolve Its Financial Crisis Before the Need for State Assistance
As a result of agreeing to raises that it could not afford and of repeatedly failing to adequately contain its costs, Sacramento Unified may need to request state assistance in the near future. The district projects that it will run deficits in the next several years and largely deplete its general fund in October 2021. In order to avert the projected deficits, it should have already made the cuts necessary to remain fiscally solvent. However, it has not done so, and it lacks a plan for doing so. If Sacramento Unified determines it has insufficient funds to meet its current obligations, state law allows it to request an emergency loan from the State. If the loan is large enough, an administrator will be appointed who will assume the role of the district’s board and superintendent. Under these circumstances, Sacramento Unified’s employees and students will both likely face numerous, negative repercussions.
If Sacramento Unified needs to take state assistance, it will mean fewer funds available for student education because of interest payments on the loan and the cost of hiring an administrator, among other expenses. According to the fiscal adviser assigned by the county office superintendent, school districts usually borrow the amount they need to cover their ongoing structural deficits for three years. The loan amounts and the subsequent annual costs vary depending on the district’s ongoing deficit spending, fund balance, and cash balances at the time it requests the loan. Further, interest rates at the time a loan is taken may affect annual costs. Based on a loan of $80 million, which is about the sum of the district’s projected general fund deficits over the next three years, and assuming that the district makes no changes in its spending, Sacramento Unified could pay about $5 million annually toward principal and interest on the loan. Further, the total interest on the loan could amount to $21 million over the 20-year life of the loan, funds lost to the district.
In addition, state law requires the district to take on additional costs if it accepts a loan, including paying for annual reviews by FCMAT and hiring an administrator. According to an intervention specialist at FCMAT, each FCMAT review would likely cost between $250,000 and $325,000 while the administrator would likely cost between $225,000 and $275,000 annually. However, the costs of hiring the administrator might be mitigated because state law requires the district to release its superintendent if an administrator is appointed and caps the severance pay for the superintendent at six months.
Given the implications of accepting state assistance, we expected Sacramento Unified to have developed a detailed plan for resolving its financial concerns. In its most recent fiscal year 2019–20 budget, which it submitted in October 2019, Sacramento Unified states that it needs to make $27 million in ongoing expenditure reductions—$16 million in fiscal year 2020–21 and $11 million in fiscal year 2021–22—to eliminate its deficit spending. However, as of October 2019, the only substantial cost-savings proposal it has put forward is reducing teachers’ health benefits through negotiations. As we discuss in an earlier section, this change would save the district $15.7 million. Sacramento Unified projects that the $27 million in reductions it needs to make would result in it having $20,000 more in ongoing revenue than ongoing expenditures in fiscal year 2021–22. However, as Figure 9 shows, these reductions alone would likely not be sufficient for it to avoid continued deficit spending in fiscal year 2022–23.
Sacramento Unified’s Recommended Expenditure Reductions May Not Be Sufficient to Prevent Insolvency in Future Years
Source: Sacramento Unified’s October 2019 budget proposal and auditor calculation.
Note: Expenditures and revenues tend to increase each year regardless of a district’s action. For example, costs rise because employees’ pay increases with additional experience. Revenues may increase because of cost-of-living adjustments included in state funding. Overall, Sacramento Unified’s expenditures are increasing at a faster rate than its revenue.
* We projected fiscal year 2022–23 by trending the revenues and expenditures Sacramento Unified presented for fiscal years 2018–19 through 2021–22.
Sacramento Unified has not yet adopted a detailed plan to resolve its fiscal crisis. In Figure 10, we present the potential savings of several options that Sacramento Unified could take to eliminate its structural financial problems. For example, Sacramento Unified currently provides higher salaries and health benefits than other nearby districts and it requires teachers to pay only $20 per month to fund their retiree health benefits. Recently, the Service Employees International Union representing state employees reached a tentative agreement for those employees to contribute a total of 3.5 percent of their salaries to retiree health benefits by July 2020. If Sacramento Unified reduced all employee salaries by 2 percent, capped health benefits for all employees at 90 percent of the cost of the lowest-price plan, and required teachers to pay 3.5 percent of their salaries toward their retiree health benefits, the district could reduce its ongoing costs by $28 million annually.
Sacramento Unified Has Options for Avoiding Insolvency
Source: Sacramento Unified’s financial records and health plan rate sheets.
* Teachers currently pay $20 per month toward retiree health benefit costs, or about 0.3 percent of their average salary..
† These changes would not result in immediate savings unless Sacramento Unified reduced its contributions by the amount of the increased employee contribution.
However, these changes still may not be sufficient to eliminate Sacramento Unified’s deficit spending and avoid insolvency. Sacramento Unified and its board will need to make difficult choices to address the district’s structural financial issues, and they will need to act quickly if they wish to avoid the difficulties inherent in accepting an emergency loan from the State and appointment of an administrator. Using the type of analysis we present here as a foundation, Sacramento Unified will also need to negotiate a plan with its teachers union for the benefit of the district, its employees, and—most importantly—its students.
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 actions that would result in expenditures that exceed 200 percent of their required reserve amount. County office superintendents should disapprove any district action that they determine would cause school districts to do either of the following:
- Project insolvency within the current fiscal year or two subsequent fiscal years.
- Rely on reserves or other one-time resources, such as one-time funds from the State, to remain solvent within the current fiscal year or two subsequent fiscal years.
To help ensure that school district boards are accountable for the costs they approve, the Legislature should consider amending state law to require those boards to certify the district’s ability to meet the costs disclosed in each collective bargaining agreement.
Sacramento County Superintendent of Schools
To ensure that Sacramento Unified takes the steps necessary to address its fiscal crisis, the county office superintendent should do the following:
- Direct Sacramento Unified to submit a corrective action plan by March 2020 that consolidates the district’s plans to resolve its fiscal crisis.
- Ensure that Sacramento Unified addresses the issues identified in this report, including its executive management turnover and lack of policies guiding its budget process.
- Ensure that Sacramento Unified implements all of the recommendations detailed below.
To address its current financial problems, Sacramento Unified should do the following:
- By March 2020, adopt a detailed plan to resolve its fiscal crisis. The plan should estimate savings under multiple scenarios and include an analysis that quantifies the impact of reductions the district can make to ongoing expenditures. Specifically, Sacramento Unified should consider the impact of possible salary adjustments for employees in different bargaining units and include the impact those salary adjustments would have on postemployment benefits, such as pensions. It should also use the most recently available data to estimate net savings from modifying the health care benefits it provides to employees, as well as the impact those modifications would have on the total compensation of the employees. Finally, it should calculate the impact of possible changes to district and employee contributions to fund future retiree health benefits. The district should use the plan it develops as the basis for its discussions of potential solutions with its teachers union.
- Revise its multiyear projections and update them at least quarterly until it has taken action that would cause it to no longer project insolvency. It should disclose these projections to the board.
- The district should adopt and disclose publicly a multiyear projection methodology. This methodology should disclose the assumptions and rationale used to estimate changes in salaries, benefits, contributions, and LCFF revenue—including changes in enrollment and the source and reliability of the data used to make these projections.
- Before it imposes an agreement on its teachers union or accepts state assistance, the district should publicly disclose the likely effects that such actions will have on the district’s students, faculty, and the community, and its plans to address these effects.
To prevent a similar fiscal crisis in the future, Sacramento Unified should do the following by July 2020:
- Have the board adopt a budget methodology, including guidance on the use of one-time funds, the use and maintenance of district reserves, and the maintenance of a balanced budget. The methodology should use the Government Finance Officers Association’s best practices as a guide and should address at least the following areas:
- Including administrators from different divisions of Sacramento Unified into the budget development process to help ensure the accuracy of projections.
- Establishing criteria and measures for success in the budget process, such as whether budget decisions were made with adequate input and deliberation and whether the budget was balanced without using reserves or one-time revenues for ongoing expenditures.
- Developing and adhering to a multiyear funding budget plan, with the goal of realigning resources where necessary to fund ongoing expenses with ongoing revenue.
- Conducting an analysis of variances in budgeted and actual revenues and expenditures at each interim reporting period. Sacramento Unified should then use this information to inform its estimates for the upcoming fiscal year’s budget.
- Develop a long-term funding plan to address its retiree health benefits liability. The plan should include appropriate action necessary to ensure the district will be able to meet its obligations to its employees and retirees.
- Adopt a policy that guides staff on steps they should take to ensure that special education expenditures are cost-effective. The policy should include consideration of options for offering services, including those provided by district staff or by contracted providers.
- Annually apply for available state funding for its extraordinary special education costs.
- Develop and adopt a succession plan that ensures that it has staff who have the training and knowledge necessary to assume critical roles in the case of turnover.
- Develop effective employee orientation programs, including mentorship, to allow incoming leaders to better adapt to the organization’s structure and culture.
We conducted this audit under the authority vested in the California State Auditor by Government Code 8543 et seq. and according to generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives specified in the Scope and Methodology section of the report. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.
ELAINE M. HOWLE, CPA
California State Auditor
December 10, 2019