Tucson Unified School District Governing Board member Michael Hicks has called upon the Board’s President Adelita Grijalva to call for an special meeting of the Board due to the recent revelations that the District is facing a $15 million deficit. Hicks, whose inquiry revealed the deficit, is responding to his constituents in this request.Hicks has been has been contacted by members of the business community and District staff, who have serious concerns about the repercussions of the revelations. Either through their own experience or that of colleagues, Hicks’s constituents have had concerns about the welfare of the District under the current leadership.
Dr. Stegeman in his constituent letter today: “TUSD overran its budget by $5 million last year and is running deeply in the red this year, burning rapidly through its reserve cash. Awwad has projected a major cash shortage next year, as current trends imply that the cash reserves will be exhausted in mid-2015. Allowing this situation to develop all through this year’s budget process, and hiding it, is terrible financial management. The board should now consider midyear spending cuts, protecting the schools as much as possible, to prevent a very hard landing next year.”
Hicks has also been approached by staff, who have assured him that facts laid out in an anonymous letter purported to be written by administrators, is wholly accurate and deserves the Board’s attention. Hicks said, “We have been refused access to vital information. It appears that our request for a Special Meeting to publically discuss the matter is being thwarted by the Board President. Our students, parents, and stakeholders cannot afford a delay in finding solutions.”
“If we must consider spending cuts as a result of failed leadership, let’s get started on a transparent process so that we can avoid cutting teachers and other site staff. I am calling on the leadership to give us a chance to save our classrooms,” concluded Hicks.
Stegeman letter:
TUSD report: October 1, 2014
Dear supporters and correspondents,
My brief note last Wednesday said that I would update you when I understood the budget situation better. Here is that update.
The current (bad) budget situation.
Last Wednesday Yousef Awwad (a TUSD Deputy Superintendent who just resigned to become CFO for the Portland, Oregon school district) sent the board more complete budget data than it had previously received. Awwad was responding to a direct request from Michael Hicks. I attached Awwad’s spreadsheet to the email, and I have appended his comments interpreting the spreadsheet to the end of this letter.
Having studied the spreadsheet, here is my current understanding of the situation:
Fiscal year 2013: The Pedicone administration ended with slightly over $14 million in cash reserves.(This does not include any of the reserves in the medical benefits trust, which is a separate entity.)
Fiscal year 2014: The Sanchez administration overspent the budget drafted by the outgoing Pedicone administration by about $5 million, probably depleting the cash reserves to about $10 million. (My figures are not exact, and I don’t think that TUSD has formally released those figures yet.)
Fiscal year 2015 (in progress): Although TUSD’s Maintenance and Operations budget capacity is down by about $2.5 million this year, due to enrollment declines, the current budget increases spending by about $13 million over last year’s budget. Therefore, if TUSD is spending the budgeted amounts, it is currently running an operating deficit of over $1 million per month. TUSD is doing this by rapidly burning through its remaining cash reserves. At this rate, the district would run out of cash sometime next Spring.
In reality, TUSD is probably spending less than is budgeted, mainly because some budgeted positions are unfilled and many teaching positions are currently filled by lower-cost substitutes. Leaving positions unfilled may allow the district to postpone the day of reckoning for a few weeks, but I doubt that TUSD can stretch its current reserves all the way to the end of the fiscal year (June 30) without midyear budget cuts.
Awwad’s written comments sound slightly more optimistic. He appears to believe that TUSD can stretch its cash – barely – to get through June. Either way, the district will have no reserves left to support continuation of the operating deficit into the next fiscal year. That is a major source of the projected $15 million deficit for FY 2016: TUSD will no longer have cash reserves with which to support the operating deficit.
The unknown factor is the court-ordered release of state funds to school districts throughout Arizona. I estimate that TUSD’s share of that $317 million would be about $14 million. If some or all of this arrives in the next few months, then it could bail TUSD out – temporarily.
How did we get into this alarming situation?
It is important to understand that this situation is self-created. TUSD’s state funding formulas have been known since the legislature adjourned in April, and there were no major surprises. Enrollment funding is based on the previous year, so that has also been known. Therefore, there is no new information that suddenly created this crisis. Central administration has surely been aware of the deficit for months and knowingly crafted a budget, in June and July, that required depleting the cash reserves (the “rainy day” fund) to cover a large operating deficit.
I have been concerned for months about spending exceeding revenues, as I have mentioned in several previous letters. That is one reason that I voted against this year’s budget, which passed 3-1 (with Hicks not voting). Many could see that Central was increasing spending for various projects with no new revenues to pay for them and no major offsetting spending cuts. These projects include about: at least $2 million in new Central administrative positions and raises (only a fraction of which have been funded from the desegregation budget), $2 million for major renovations to convert two schools to day care centers, $2 million in unbudgeted salary increases for teachers (augmenting the original compression plan), $2 million for ERP implementation, $1 million for various audits and consultants, and unknown amounts for expanded IT upgrades and hiring additional teachers to implement class size reductions (which were partly but not wholly funded from Title I), etc. (All of these figures are approximate.)
I did not imagine, however, that the operating deficit was so large or that the staff’s presentation of the budget to the board and public could omit such critical information. I should have pursued the issue with greater diligence.
It is now clear that TUSD’s recent financial management has been irresponsible and reckless.
It is also clear that staff members were concerned. Responding to a followup email from Hicks, Awwad wrote on Thursday:
“I and Karla [the CFO] have been talking to the superintendent and cautioning him against decisions being made without consultation with finance or my office as early as last March and April. Emails and memos from myself and the CFO were sent to the sup to caution against the budget process and financial decisions.”
One may reasonably speculate that district leadership (above Awwad) had hoped to postpone revelation of the current and projected deficits until after the election.
Why was the budget problem revealed last Wednesday?
The superintendent generally controls the flow of information to the board, and he did not mention the operating deficit until Michael Hicks finally did what I should have done: he bypassed the superintendent and asked Awwad directly about the budget situation. The next day Awwad provided the spreadsheet and comments that I attached to the email and appended to the end of this letter.
Awwad copied his response to the governing board office, which forwarded it to the board and superintendent at 11:23 last Wednesday morning. At that point, the district could no longer hide the situation and it became
urgent to frame it favorably. By 4 p.m. TUSD was holding a press conference and issued a press release explaining that it was reacting proactively to circumstances created by the state. It read, in part:
Tucson Unified School District Superintendent H.T. Sanchez held a press conference on Wednesday to alert taxpayers about a budget issue that could affect education in Tucson next year. As the State of Arizona continues to cut per pupil funding, TUSD is looking ahead to the 2015-16 school year, which is facing a potential budget deficit of $15 million.
“We are beginning this conversation now as opposed to after the fact, so that we can be proactive,” said Superintendent Sanchez. “We want to assure the community that the 2014-15 budget remains balanced and committed to providing high-quality education for all students.”
I think the draft from that spin was felt all over Tucson.
A simultaneous press release by Grijalva, the board president, refers to Awwad’s deficit projections being based on a “worst-case” loss of 2,200 students. If you study Awwad’s spreadsheet, however, you will see that he never makes that assumption, for 2015-16 or any other year. For next year, in particular, his calculations assume a decline (in “average daily membership”) of slightly over 1,600 students. Even that is a “worst case” assumption, based on recent experience, but that issue is not even relevant to next year’s projected deficit, because next year’s enrollment does not reduce funding until the following year.
Grijalva’s press release also explained the board’s response, saying “We will be directing the superintendent to…,” though the board had never discussed the situation in an open session.
The Open Meeting Law lives a hazardous life in TUSD.
Questioning Awwad’s projections.
Since Wednesday the district and its representatives have begun to question the reliability of Awwad’s projections. In Monday’s TUSD candidate forum, for example, Grijalva said she is not convinced that a shortfall exists. She criticized Awwad’s projection and said there is a “sizable difference in what the projected [deficit] versus what our reality is.” Of course all future projections contain uncertainties, but the current operating deficit is alarming before even considering the future projections.
It also seems strange to question Awwad’s analysis, given his intimate knowledge of TUSD’s finances and statewide reputation. He was TUSD’s CFO before he became Deputy Superintendent, and before that he was the Director of School Finance at the Arizona Department of Education. He wrote the presentation, which is still posted on the ADE website, about how Arizona school finance works.
So the problem has several layers. First, it is bad enough that district administration knowingly began to outspend its revenues. Second, it hid the situation until Awwad exposed it last Wednesday. Finally, district leadership is trying even now to minimize and obfuscate the operating deficit.
In contrast, the Pedicone administration in 2012 alerted the board early to impending budget problems and held emergency study sessions in May and June, before the annual budget process.
Options.
The board should receive an immediate report on TUSD’s cash reserve position and burn rate, as well as updated projections for the rest of the fiscal year. I believe that TUSD’s current CFO is competent to produce these data, without spending yet more money on yet another external consultant to tell us how bad the situation is.
Based on that analysis, the board should consider immediate midyear budget cuts, preserving schools’ budgets to the greatest extent possible and protecting promises already made.
Some truly wonderful things are happening in many TUSD schools, based on the hard work of our staff, parents, and others in Tucson. (My next letter will reinstate the “Good News” section!) If the district can ever sort out its leadership problems, then I still believe that it has the resources and community support required to rebuild a great school district.
Thanks for your support, concern, and commitment. Awwad’s comments are on the next page.
Mark
Awwad’s original comments in response to Hicks’s request, accompanying the spreadsheet:
Yes I will be happy to [provide the budget information and projections]. I have put together the attached estimates. The picture does not look good for FY2016. Come July 1st 2015 I am estimating that we will be in a deficit position of about $15 million. For the current fiscal year FY2014-2015, we will barely meet the budgeted expenditures, last fiscal year FY2013-14, we overspent our budget by about $5 million.
Based on my analysis I recommend the following:
• Monitor the expenditures and place hiring freeze by January 1st if our actuals are in line with our budget.
• You may want to consider specific measures to reduce the budget for Next Fiscal year in the next few months. The amount should be determined based on how much the state will fund schools for the court order.
• Our Capital funding is at risk, I suggest we freeze capital spending immediately and monitor the expenditures closely to ensure that the district does not overspend its capacity.
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