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Ticking Timebomb: San Diego Unified’s Finances…

September 14, 2011

San Diego City Schools are going to be in trouble next year when it is time for the contract that was signed a couple of years ago with SDEA to comes to fruition.  This is a long but well written article that should be a must read if you are a San Diego Unified School teacher.

  • In March 2010, the San Diego Unified school board inked a deal with the teachers’ union that shaved costs from the budget in the short-term but was also a bet on increased state funding in later years. Above, former school board member Katherine Nakamura, board member John Lee Evans, Superintendent Bill Kowba and board President Richard Barrera.

Two Gambles, and a Gamble on a Gamble
The District’s Gamble
San Diego Unified’s 2010 labor deal was essentially a bet on the state’s finances turning around. The district negotiated two years of unpaid furloughs for teachers to deal with an immediate budget crunch, followed by a series of raises in the final year. But the state’s finances haven’t turned around, and now the district is tied into paying the raises, regardless of whether it gets any extra money from Sacramento.• To win the bet: The state’s finances have to turn around drastically, by more than $4 billion in tax revenue. Even then, state politicians would have to agree to carve out more money from that extra revenue for schools.

• If it loses the bet: Along with other increasing costs, the raises and the furlough days ending will mean the district starts next year $57 million in the hole and would again face the prospect of layoffs.

The State’s Gamble
In the spring, Sacramento lawmakers passed a budget based on a bet that the state’s finances would improve. Legislators essentially assumed that California would bring in billions more in taxes the next year. That’s already looking like wishful thinking.• To win the bet: The state has to bring in $4 billion more in taxes this year than it did last year, or it will have to make mandatory cuts to higher education, senior care and K-12 education.• If it loses the bet: School districts lose out if the state doesn’t bring in enough extra revenue. San Diego Unified could get about $30 million less than it was expecting.
The District’s Gamble on the State’s Gamble
Rather than playing it safe, San Diego Unified decided to rehire more than 300 teachers on the strength of the state’s financial promises. The district has already committed to spending that money this year, since it can’t lay off the teachers it rehired.• To win the bet: The state has to bring in at least $2 billion in extra revenue for the district to get the extra money it is hoping for. • If it loses the bet: Without the extra money, the district will have overspent this year by $30 million, which will be added to next year’s deficit, bringing the total projected deficit to $87 million. 

The San Diego Unified School District’s latest labor deal is a lot like one of those interest-only loans that helped sink the housing market and brought the economy to its knees.

For the first two years, the district doesn’t even have to pay what it’s supposed to. Teachers and other workers agreed to take five unpaid days off, trimming about $20 million each year from the district’s budget at a time when it desperately needs the cash.

The third year, however, is a ticking time bomb: Salaries essentially jump 10 percent in 12 months as the five days off go away and workers get three successive pay increases that will eventually cost $53.2 million annually.

The deal was based on a gamble.

Like homeowners who took out those risky loans hoping to make more money in a couple of years, the school board bet on California’s economy turning around. The hope when the deal was signed in March 2010 was that with more tax revenue, the state would increase education funding enough to pay for the raises.

“Let’s all just pray that it gets better in the next couple of years,” John Anella, a member of the teachers union’s negotiating team, said at the meeting where the deal was approved.

But a year and a half after the contract was signed, it’s looking less and less likely the district’s gamble will pay off.

The state’s finances remain in serious trouble. The conversation in Sacramento today isn’t about education funding getting better soon; rather, it’s about whether it’ll get worse.

San Diego Unified says it will already need to fill a $57 million hole in its budget to pay for the salary increases and other rising costs next year. But that’s only if there’s no further decrease in state funding and the state’s optimistic revenue projections pan out.

The district has been grappling with deficits for several years. Steadily increasing salary and benefit costs, combined with deep cuts from the beleaguered state, have forced San Diego Unified to significantly reduce services like school busing and lay off more than 1,000 people.

But while the state’s problems continue to burden districts across California, San Diego Unified has potentially exacerbated their effect with a series of decisions that threaten to further erode class sizes, beloved programs and its overall financial footing.

The back-loaded labor deal is a stark example. While it may have saved the district in the short term, the long-term costs of the 2010 deal, combined with Sacramento’s continued troubles, could prove devastating for San Diego schools.

With the district now spending more than 90 percent of its discretionary budget on employee pay and benefits, there are few places to turn for savings outside the pink-slip machine.

“I’m just sitting back and scratching my head thinking, ‘Where’s the money going to come from?'” said Rick Knott, who left the district as its chief financial officer in 2003.

“The only thing they can do is cannibalize themselves.”

San Diego Unified’s Big Gamble

Before supporting it, former school board member John de Beck called the deal “one of the worst settlements I’ve been around in 30 years.”

The fundamental underpinning of California school finances shifted dramatically a few years ago.

Local school districts depend on the state for their budgets, and each year California typically boosts the amount it hands out to keep up with rising living costs. Districts and unions have traditionally used that boost as a benchmark for negotiating teacher pay.

But in 2007, change was brewing in Sacramento.

The economy had already begun its decline from the housing bubble’s heady years. Ron Bennett, CEO of financial consultancy School Services of California, said most unions regarded 2007 as “the last of the good years.” They wanted to get something while they could, he said, and that made negotiations difficult.

In San Diego, with teachers beating the drum about low wages, district officials and the unions met around the negotiating table that year — just one year into a two-year deal they had previously signed.

The parties agreed on a new contract that provided a 4.25 percent pay increase and lowered the bar for reaching the highest salary level from 23 years of service to 17.

Then the bottom dropped out of the economy.

In January 2008, California school districts found out they wouldn’t be getting their typical cost-of-living boost from the state. Not only that, but the state gave districts 15 percent less than it had the year before.

“We follow this closer than anyone else in the state, and we were shocked,” Bennett said.

California school finances have never been the same.

School districts have continued to receive at least 10 percent less funding than they once did, Bennett said. The average unified school district received $5,820 a student in 2007. This year, it’s $5,220.

In San Diego, state education funding hasn’t kept pace with the steadily increasing cost of paying for salaries and benefits. So the district’s had to cut back steadily on the number of people it employs, while paying out more and more to employees.

After the 2007 pay increases, the next two years passed without a labor deal in San Diego. Talks stalled. Three key negotiators left the district or retired. The union replaced its leader.

However, as 2010 approached, the district needed relief, badly.

The school board asked all district employees to take an 8 percent pay cut to help bridge a $93 million deficit. Employees pushed back.

Eventually, the two sides shook on a deal: Teachers would take off five unpaid days for the first two years, the equivalent of about a temporary 3 percent pay cut. That would save the district about $20 million each year.

It also helped the district forego teacher layoffs while cutting the pay of teachers who were already underpaid compared to their suburban colleagues.

The deal was a gamble that counted on a drastic turnaround in the state’s economy to pay for the three salary increases offered workers in the final year.

Labor leaders told the Union-Tribune the deal was a “monumental victory.”

During the school board hearing in which the deal passed, however, nobody celebrated. Nobody really said much about anything. During the seven-minute public hearing, only one school board member spoke.

Veteran trustee John de Beck told the board the deal was “one of the worst settlements I’ve been around in 30 years.”

“I think it’s risky for both the union and the district,” he said.

Three union officials urged the school board to approve the deal. The school board voted 4-0 in favor of it, including de Beck.

In a recent interview, school board President Richard Barrera said the 2010 labor deal allowed the district to dodge even more serious layoffs and cutbacks.

For the three fiscal years covered by the deal, the district will actually save money, Barrera said. The $40 million it will recoup from furlough days will more than pay for the salary raises over that period, he said.

The full impact of the salary raises won’t kick in until July 1, 2013. At that point, the school district will have burned through any savings from the furloughs and will be largely at the mercy of the state, Barrera said.

But that’s still a couple of years off, and there’s still a chance California’s economy will turn around and the state will start reinvesting in schools, Barrera said.

“Those are political decisions, and a lot of that depends on how much the education community is unified in its ability to advocate for more education funding for the state,” Barrera said. “It’s certainly fair for people to say we need to start planning for this.”

Still, the school board has already been trying to get out of the deal.

Earlier this year, it asked the teachers union to return to the bargaining table, put off the pay increases and extend the unpaid days off.

The union refused.

School board President Richard Barrera says the 2010 labor deal put the district on better financial footing than it otherwise would be.

The State Makes its Own Gamble

This spring, as state legislators faced the threat of losing their own paychecks if they didn’t come up with a compromise on the budget, they chose to make their own gamble with the state’s finances.

Legislators passed a budget that projected California’s tax revenue would increase by $4 billion over the next year, the result of a rejuvenated economy.

They also gave districts a confusing mandate on what to do with the unexpected money: rehire teachers and don’t worry about what happens if those optimistic projections don’t pan out.
The school board, which has made keeping class sizes small one of its top priorities, immediatelydecided to reduce the number of teacher layoffs by more than 300 when it got word from the state.San Diego Unified had previously planned to lay off about 10 percent of its workforce — 1,400 jobs, including 800 teachers.

More cautious voices within the district suggested saving, rather than spending that money.

If the state doesn’t get the extra $4 billion it’s hoping for, San Diego Unified will end up getting less money this year, not more. That would further complicate the district’s financial problems.

Because San Diego Unified has already committed to spending that money, it will have to add $30 million to the deficit it’s facing, the district estimates. That will bring the total deficit at the start of the 2012-2013 fiscal year to around $87 million.

It’s only been a couple of months since the state passed its budget, but already there are signs that the $4 billion windfall won’t happen. So far, state revenues are about $400 million below the optimistic projections made in the spring.

While it’s possible that tax revenues will grow enough to meet the state’s prediction, it’s very unlikely enough money will flow in for the state to actually increase education spending, said Jerry Nickelsburg, a senior economist at the UCLA Anderson Forecast.

It’s that kind of growth the district was banking on to help cover the salary increases that kick in next year.

“The evolution of the California economy between now and when 2012 budget decisions are going to be made does not give one a high probability that people are going to be feeling fat, dumb and happy,” Nickelsburg said.

Fixing (Yet Another) Crisis

Bill Freeman, president of the local teachers’ union, says it’s hard to trust how much money the district actually has to fill budget gaps.

San Diego Unified has a history of pulling out last-minute tricks to save its budget. That’s left unions skeptical about how much money the district actually has on hand and how much it will really have to cut if its gamble doesn’t pay off.

“They use fake numbers,” said Bill Freeman, president of the San Diego Education Association, the teachers union. “We don’t know where the district is right now because a lack of honesty providing data.”

The lack of trust between unions and the school district could prove critical during the coming months. Without any new revenue, and with the added possibility of more cuts, the district’s best option could be to get unions to renegotiate the 2010 deal.

That doesn’t even look like a remote possibility at this point.

The school district told its financial overseer, the County Office of Education, that the labor deal allows it to call for negotiations without the unions’ consent, an agreement known as a “re-opener.” That’s not true. All the district can do is ask. As they did this year, the unions can continue to refuse to bargain.

Freeman said teachers have upheld their side of the bargain and it’s time for the district to do the same. From his union’s point of view, the 2010 deal was never based on a gamble on the state’s finances turning around, he said.

The union was handing the district the time to get its finances in order, Freeman said. The two years of furlough days were designed to give the district breathing room to cut out the fat, he said.

“They need to not hire expensive administrators, not hold conferences, there are plenty of things I think they can do,” Freeman said. “It’s not our job to find the money to honor the contract.”

The district’s line is simple: No new bargaining means they will have to lay off hundreds more people. Ron Little, the district’s chief financial officer, said he’s invited the unions to come and inspect the district’s books so they can see the district’s not hiding money anywhere.

None of the unions have taken him up on the offer, Little said.

The impact on the budget year that begins July 1, 2012 is blunted because not all the pay increases take effect that year. But by the following year, all those increases, a combined 7 percent, will be on the books. That’s when things could really get dicey if the economy hasn’t yet rebounded.

Without any extra money from the state, the district projects it will have to make additional cuts of at least $65 million that year to balance its budget.

Dealing with that will take even more layoffs, a new labor deal, or another roll of the dice with the state’s economic condition.

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