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How LAUSD plans to stay solvent: Increase class sizes and claim what principals don’t spend

Sarah Favot | August 22, 2017

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Superintendent Michelle King

How can LA Unified keep itself solvent? Add four more kids to every classroom and take back any money that principals don’t spend at the end of the year.

Those were two of the proposals that board members heard Tuesday during an update that announced new hits to the budget since board members approved it two months ago.

During Superintendent Michelle King’s report to the school board, the district’s new chief financial officer, Scott Price, explained how LA Unified plans to maintain a minimum reserve of 1 percent of its expenditures — or $75 million — as required by the state over the next three years. The LA County Office of Education requires districts to show how reserves will be maintained three years out. Price pointed out that every other school district has a higher minimum reserve than LA Unified’s, such as 3 percent or 5 percent.

Some new costs have arisen since June, when the school board passed a $7.5 billion budget for the 2017-18 school year. Those costs, combined with other long-term expenses like pension contributions, threaten the district’s solvency and its ability to maintain its reserves.

A major cost is what the district is required to pay into employees’ retirement funds, known as CalSTRS and CalPERS. This year, the district’s mandatory contribution is increasing by 2 percent, which will cost $90 million. The “devastating” contribution increases will continue through 2021, Price said, when it is predicted the hikes will slow down or stop.

The district is also burdened with $13.6 billion in unfunded liability for retiree healthcare benefits, but it has chosen not to pay that down, so that it can maintain its reserves. It will not contribute to this fund, known as OPEB, in either 2018-19 or 2019-20.

Then there are the new hits to the budget. Without providing details, Price announced that the district faces an additional $150 million liability for potential legal costs and settlements that were not included in the budget approved in June. The district is also in negotiations with the state regarding its audit of the district’s cafeteria fund that could result in a $68 million liability. The state contends that some monies spent through the cafeteria fund were not proper expenses. Price said he is hopeful that the penalty could be negotiated down.

Next year, the district may also have to contend with a penalty the state imposes when a school district has too many administrators compared to students. LA Unified has increased its administrative staff even as enrollment has declined. This year’s budget, however, includes a 22 percent reduction in the central office budget, which included administrative layoffs, but that was not enough to comply with the ratio. In the past, the district has received waivers and has not had to pay the penalty for surpassing the ratio. But next year officials predict the penalty will be $24 million.

Price offered some good news, including a $5 increase per student in average daily attendance provided by the state lottery, which will result in $2.6 million in additional funds to the district. The district also received $72 million in one-time revenue from the state.

By the 2019-20 school year, the district faces a $422 million deficit, and it is looking at various ways to offset that and maintain the required minimum reserve of 1 percent.

Price showed that the district’s reserves for this year are 4.66 percent, which is expected to drop to 1.58 percent next year, and then to 1.04 percent in 2019-20 — above the minimum requirement by the slimmest of margins.

But to do that, to stay above the 1 percent minimum reserve in 2019-20, the budget plan outlined Tuesday proposes that the district increase class sizes by four students and take back unspent money from schools, known as carryover. The district predicts it will have $246 million in carryover from schools that year.

King said district budget staff worked hard so that principals could keep their carryover this year, but will be unable to do so in 2019-20. In response to a question from school board member Nick Melvoin about whether principals are aware they will lose this money, King said principals have been notified and said she will reiterate that point at upcoming meetings, so they can develop plans to spend the money.

Board member Richard Vladovic predicted principals will spend it and the district will have to come up with another revenue source.

“Have a plan to find that $246 million,” Vladovic told Price, “because it won’t be there.”

Some school board members spoke against the plan to increase class sizes.

“That’s an impossible task,” said Scott Schmerelson. “If I had my druthers I’d have it erased from this page.”

George McKenna said he wasn’t against raising class sizes, especially if class sizes in the district’s lowest-performing schools could be reduced while class sizes in highest-performing schools increased.

In closing, Price said, “We have a lot of work we need to do going forward.”

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