FCMAT Report Heightens Concerns

Dear School Board Members:

I am writing with respect to the Fiscal Crisis & Management Assistance Team's ("FCMAT") report setting forth FCMAT's findings and recommendations concerning the District's financial condition.

I had hoped the FCMAT report might be the source of positive news about the District's financial situation. Unfortunately, however, the FCMAT report reinforces and in some respects heightens my concerns about the District's financial condition as well as its fiscal management practices.

As FCMAT notes on page 2 of its report, unless the District remedies its pattern of deficit spending, which appears to be structural in nature, "the District may need outside financial assistance and may face the loss of local governance and decision-making authority."

The FCMAT report indicates that its multi-year financial projection ("MYFP") was guided by three objectives, including "to achieve and sustain a balanced budget." (p. 2) FCMAT concludes that the "goal of sustaining a balanced budget will be extremely difficult because of continued declining enrollment and future demands for salary and benefit compensation." (p. 2)

Some, no doubt, will seize upon FCMAT's finding that the District will be able to maintain the minimum required reserve of 3% for the balance of this fiscal year and the two subsequent fiscal years if its recommendations are followed. However, focusing narrowly upon this FCMAT finding would be a serious mistake.

More importantly, FCMAT documents the District's ongoing structural deficit in the General Fund -- with expenses substantially in excess of revenues for the current and subsequent two fiscal years. Indeed, the cumulative operating deficit for these three years is projected by FCMAT to be about $9 million dollars including approximately $4.5 million dollars in year two (2008-2009).

Considering that the District is now commencing preparation of its FY 2007-08 budget, which requires a projection through FY 2009-10, it is unfortunate that FCMAT did not also include a projection for 2009-2010 in its report. Presumably, FCMAT will confirm, if asked, that absent dramatic changes in District revenues and/or expenses, the District will face a financial crisis in year three of the pending budget projection even assuming the District is able to secure voter approval of renewed parcel taxes.

It is imperative that the Board and the Superintendent publicly acknowledge the seriousness of this problem and take prompt action to develop a recovery plan to address it. The District's structural budget deficit has been identified by the Financial Oversight Committee and the Los Angeles County Office of Education as a significant area of concern. The District's tentative settlement with the SMMCTA has greatly accentuated this problem.

To be fiscally responsible, the Board must immediately begin developing a plan to eliminate the District's substantial structural deficit. Waiting until the District runs out of reserves will have the effect of turning a significant fiscal problem into a financial crisis that will cause untold harm to the District, its teachers and its students.

At this pivotal moment, the District needs to focus its energies on addressing its existing and future financial challenges and regaining its credibility for prudent financial management. Your credibility, however, will depend in part upon your willingness to acknowledge prior mistakes. The FCMAT report contains clear evidence, though subtly presented, of how irresponsible the Board acted last Fall in tentatively approving the SMMCTA agreement without a clear strategy to pay for it.

It is now even more apparent that the Board did not understand the budgetary implications of its decision to use one-time-only reserve funds as the basis for approving annually recurring (and escalating) salary and benefit increases. This decision, which violates a basic rule of public finance, has contributed substantially to the District's budget deficit.

A fiscally viable recovery plan will, no doubt, involve painful cuts in District staffing and programming. Given that with approval of the tentative agreement District labor costs are approximately 92% of its overall unrestricted expenditures, this is inevitable.

Still, the public school community and general public in Santa Monica and Malibu strongly support public education and are likely to respond positively to honest and forthright leadership from the Board and District administrators, and the voters are likely to renew and possibly expand our District's two parcel taxes, if the District is able to restore public confidence in its financial management practices.

What should the Board do at this point? I suggest the following for your consideration:

• The Board should ask the Financial Oversight Committee or an ad hoc committee to assist in developing a fiscal management recovery plan designed to eliminate the District's structural General Fund deficit by FY 2009-2010, with substantial progress made to close this deficit in the intervening years. This effort should be included as part of the plan for developing the FY 2007-08 budget.
  
• In conjunction with this effort, the Board needs to support the Superintendent’s initiative to promptly evaluate its enrollment policy (including its permit policy) and staffing ratios given the FCMAT report's documentation of the District's declining enrollment and its budgetary implications. This is, quite obviously, a sensitive subject with both budgetary and policy implications. Some parents oppose permits for non-Santa Monica residents as a matter of principle. I am not one of them, and believe a much more pragmatic approach to the District's permit policy (and one which recognizes the strong connections that many non-residents have with Santa Monica-Malibu and our public schools) is more appropriate.
  
• Given that approximately 92% of the District's unrestricted general fund is committed to salaries and benefits, the District needs to take a very careful look at salary/benefit cost containment measures. The Board and the Superintendent should clearly commit to only approving future salary/benefit increases if such increases are compatible with the financial objective of a sustainable balanced budget; the Board cannot rely upon one-time-only funds to pay for annually recurring salary/benefit increases.
  
• The Board should immediately form an ad hoc committee to begin the process of developing a strategy for renewing its two parcel taxes, the first of which expires in June 2009 (Measure S).
  
• Given the importance of securing an increase in City of Santa Monica base funding of up to one million dollars (to which I believe the District is entitled under its contract with the City), the Board needs to eliminate all obstacles to obtaining this additional City funding. This will necessarily require greater District financial accountability and transparency.

There are, no doubt, other steps the Board should consider taking in response to its current and anticipated financial challenges. The foregoing points are intended to contribute to the Board's dialogue and deliberations about its future course of action.

In closing, this letter is written from the vantage point of one who attended public schools in Santa Monica (Grant, Will Rogers, John Adams and Samohi), has two children in the School District, served on the Financial Oversight Committee for five years, has been an active supporter of the District for many years including all District bond measures and parcel taxes, and who cares deeply about the District and its future.

I ask that you consider my suggestions as well as my criticism of recent District financial decisions in this light.

Sincerely,