State of California Declares SFUSD Financially Unstable and Intervenes to Take Control
On September 15, 2021, the California Department of Education issued a letter to San Francisco Unified preemptively determining that the district is not financially stable enough to meet its obligations and continue its business for the foreseeable future. As a result, the state will impose certain controls in an attempt to keep the district solvent. Below is a detailed summary of the letter:
Headline: This letter is a very big deal. SFUSD is in dire fiscal trouble and the State Superintendent of Public Instruction (SSPI) is stepping in to try to help SFUSD avoid a mandatory state takeover. Let’s break down what the letter says section by section.
Preamble: State law requires a unified school district to be fiscally sound. SFUSD’s financial projections indicate that it is not fiscally sound and needs to quickly takes drastic action. Therefore, the SSPI must legally consider SFUSD “no longer a going concern,” which requires the state to take specific interventions.
Basis for Determination: Although SFUSD has been aware of its fiscal issues for over a year, it has failed to take any steps to address it. The SSPI requested that SFUSD submit a fiscal recovery plan, but SFUSD has not done so. This is why the SSPI has determined SFUSD is no longer a going concern.
Implications: According to state law, a school district must maintain financial standards that enable it to meet the standard accounting definition of being “a going concern.” Once a school district is determined no longer to be capable of fiscal self-management, the law requires the SSPI to take any of the following six actions, as necessary, to keep the school district solvent. As of now, the SSPI is only implementing the first action.
Action #1: Assign a fiscal expert to advise the district on its financial problems – this is the action the SSPI is currently taking
Action #2: Conduct a study of the financial and budgetary conditions of the district
Action #3: Direct the district to submit a detailed financial projection
Action #4: Require the district to encumber all contracts and other obligations and manage cash meticulously
Action #5: Direct the district to submit a proposal for fixing the underlying conditions that caused the district’s dire financial problems
Action #6: Withhold compensation of the Board of Education and Superintendent if any requested financial information is not submitted
Labor Negotiations: Because labor costs are the majority of the district’s expenses, the SSPI is hereby imposing the following two conditions on all labor negotiations until further notice:
Condition #1: The SSPI must be given at least 10 working days to review and comment on any proposed labor agreements before the Board of Education takes any action on such agreements.
Condition #2: Any labor agreements must include an analysis of their fiscal impact, and the SFUSD Superintendent and “chief business official” must certify in writing the agreement won’t bust SFUSD’s finances.
Restrictions and Requirements: As a further consequence of SFUSD being deemed no longer a going concern, the following one restriction and three requirements are imposed.
Restriction: Certain types of debt may not be issued without the prior approval of the SSPI
Requirement #1: Engage with the Fiscal Crisis and Management Assistance Team (FCMAT) ASAP and before October 15, 2021, for them to conduct a fiscal review of SFUSD
Requirement #2: Provide the California Department of Education a fiscal stabilization plan approved by the Board of Education by December 15, 2021
Requirement #3: Submit a First Interim Report that includes the BOE-approved fiscal stabilization plan with specific actions, detailed assumptions, and multi-year projections
Recommendations: Finally, until there is a plan in place, the SSPI recommends (a) freezing all discretionary expenditures and (b) implementing a hiring freeze on “all positions that do not provide direct services to students.”