Four school districts teetering on insolvency, many more could be next

Crippled by cash flow problems and credit restrictions, four California school districts are teetering on the brink of insolvency, according to the chief of the state’s school fiscal watch dog.

The four districts – Inglewood, Cloverdale, Natomas, and Healdsburg – have payroll obligations that exceed their available cash. Each district  is now close to exhausting internal borrowing and looking for other resources with the prospect for a state takeover very real.

“The question then becomes, will their cash hold out long enough to make reductions in their budget so that they have enough cash on an ongoing basis to survive? That’s the race that they’re in,” said Joel Montero, chief executive officer of the Fiscal Crisis and Management Assistance Team following testimony this week before the Assembly Budget Subcommittee on Education Finance.

The four districts are among 13 that received negative certification from the state in March – a designation assigned to local educational agencies that will be unable to meet their financial obligations for the remainder of the current year or for the subsequent fiscal year.

Another 97 districts received qualified certification– which means there is some question whether the LEA can meet their financial obligations for the current or two subsequent fiscal years.

Education officials warn these numbers would become substantially worse if the Legislature is forced to move forward with an all-cuts budget, which would likely include an additional cut to schools of as much as $5 billion next year.

As provider of last resort, the state is required to takeover school districts that become insolvent. Currently, the California Department of Education has administrative oversight of six school districts as a result of financial problems.

The CDE estimates that nearly 30 percent of the state’s student population – about 2 million students – attends school in a district that is either in the negative or qualified category.

Meanwhile, school budget managers are eagerly awaiting the release of Gov. Jerry Brown’s May budget revision, which will include updated revenue numbers from the state Controller.

But the $15 billion question is whether the governor will release his ‘all-cuts’ scenario, or once again include some mix of proposed revenue from taxes on vehicles, income and sales.

As was the case in January, the tax measures must be supported by two Republican lawmakers from each legislative house, and Brown has insisted that voters also approve them at the ballot box.

Meanwhile, GOP lawmakers remain stalwart in their demands for pension reform and other policy changes before they support the taxes.

At Tuesday’s budget hearing, Assemblywoman Julia Brownley, D-Santa Monica, said that an all-cuts scenario is still on the table and school districts need to prepare for an ADA cut between $800 to $1,000 per student.

Given the number of districts on financial life support, Montero said a cut of that magnitude is nearly unimaginable.

“From my perspective, and what I know now of working with them… I don’t see how they could survive that,” he said.