Clouds hanging over the Sweetwater Union High School District have gathered into a storm. Four sitting board members, a former board member, and a former superintendent have been indicted. And serious financial woes may soon threaten the district.
At the December 2012 board meeting, Rick Knott, interim chief financial officer, gave a presentation to the Sweetwater board that enumerated signs pointing to serious financial challenges for the district. He prefaced his remarks by saying, “I’m not saying we are at risk, but we have some of the factors that could indicate a district getting into a difficult situation.”
Deficit spending was the first issue Knott addressed: “This district has a history of spending more money than we take in,” he said.
The deficit spending bomb is set to explode in 2015. Even with the benefits of Proposition 30 factored in, the district is still in trouble. Knott warned that in 2015, “We will have a negative fund balance, meaning we will have more obligations than we have assets.”
On January 18, in a follow-up interview, Knott said his presentation was meant to be a warning to the board and the public. He explained that the chronic overspending is a result of state revenue streams shrinking and the district’s reluctance to cut programs or lay off staff.
Another predictor of poor fiscal health Knott presented in December was the district’s cash-flow problems. “We also have not had sufficient cash to meet our obligations on a timely basis, and we’ve had to borrow from other funds.”
In a 2011 article, U-T San Diego drew attention to the fact that the district was borrowing from Proposition O funds. (Proposition O was a $644 million construction bond passed in 2006.) The district borrowed $40 million from the fund intended to modernize schools in order to pay for day-to day-operations. Following public outrage over this borrowing, the district backed off from borrowing an additional $58 million.
The district then turned to borrowing from Mello-Roos funds to make payroll. There are 17 Mello-Roos (or community facilities districts) in Sweetwater. Property owners in these districts pay additional property taxes to help fund public infrastructure and services.
The district’s continued borrowing from Mello-Roos funds has caused hard feelings in the community. Even though the money is paid back, Mello-Roos-paying residents believe their money is not being spent the way it is intended and that Mello-Roos-funded schools are being short-changed and falling into disrepair.
A sound household budget has accounts set aside that anticipate the future. But according to Knott’s report and the follow-up interview with him, the district has not been putting money aside for maintenance; he used leaking roofs by way of example. Nor has money been put aside to replace the district’s aging fleet of buses. They also failed to put money aside for elections. (Knott says he has addressed these problems in the new budget.)
Another way to assess the health of Sweetwater’s budget is by comparing it to the Chula Vista Elementary School District’s budget. Sweetwater and Chula Vista have essentially the same tax base and the same Mello-Roos districts.
Anthony Millican, Chula Vista elementary’s spokesperson, discussed in a January 17 email how his district handles budget challenges similar to Sweetwater’s.
On roof repair and such: “We regularly set aside two percent of our total expenditures as a budget for routine maintenance.”
On elections: “When we know a board member election is coming up, we set aside an amount for the cost of holding the election. We allocate about $51,000 for board member elections. This year (2012) we also allocated $53,000 for the Prop E election. That is the cost that we pay to the Registrar of Voters for holding such elections.”
Another contrast between the two districts is their budget reserves. The state recommends that a district have at least 3 percent in reserve. According to Knott, Sweetwater has 3 percent, or $7 million. Millican writes: “Our ending balance reserves are 19.18 percent, well above the state’s recommended three percent minimum requirement. That is $37.3 million in dollar terms.”
In his December presentation, Knott went on to advise the board that a district is in trouble when it has a combative relationship with oversight agencies. While Knott’s comment was not specific to Sweetwater, the district has had a combative relationship with the Proposition O bond oversight committee. The committee acts in an advisory capacity to the district on expenditures from the $644 million bond construction money. At one time, the bond oversight committee passed a no-confidence vote “on [Superintendent Ed] Brand’s interactions with the committee.”
After Knott’s presentation, the board voted to certify the district’s solvency. But since then, others have spoken out regarding Sweetwater’s financial issues.
Nick Marinovich, the committee’s chair, said in a January 20 interview that he finds it a struggle to obtain the financial documents the committee needs in order to do adequate oversight. Marinovich brought up the Voice of San Diego’s August report on capital appreciation bonds that will cost Poway residents $1 billion to borrow $105 million.
When Marinovich asked district representatives if Sweetwater had any capital appreciation bonds, he says he was led to believe they did not. But he later discovered the district does have capital appreciation bonds related to Proposition BB (a $187 million bond in 2000). While the bonds do not have the devastating interest rates Poway’s have, Marinovich says the issue points to the district’s lack of forthrightness.
Kevin O’Neill, also a bond oversight committee member, brought forward another financial concern during a January 20 interview. In November 2012, the board gave the green light for the district to seek a $38 million bond-anticipation note. A bond-anticipation note is a short-term bridge loan, according to O’Neill. It comes due in five years or less. Such loans are given in anticipation of increased bond money coming in as assessed property values rise. O’Neill is concerned that Sweetwater might be buying more financial woes if assessed values do not rise before the note comes due, in which case the debt will have to be paid from the general fund.
O’Neill believes that the district should hold off on construction projects for the time being. However, Knott says the district is going to market on the bond-anticipation notes in February. ■