This letter of recommendations was addressed to the Santa Monica-Malibu Board of Education on July 31, 2001.
Dear Members of the Board:
The Financial Oversight Committee you appointed has completed its first school year of work. At the suggestion of the Board’s liaison to the Committee, Brenda Gottfried, the other members of the Committee-Patricia Hoffman (vice chair), Craig Hamilton, Babette Heimbuch, Chris Harding, Gloria Reisner, and Walter Rosenthal-and I have prepared this letter to summarize our main findings and recommendations. Drawing on an outline suggested by Superintendent Deasy and Ms. Gottfried, we have summarized our observations and recommendations in three parts: (1) planning and management of expenditures, (2) strengthening of revenues and (3) involvement of our Committee in the near term.
At the outset, we want to note our appreciation for the efforts of the District staff in educating us about the District’s finances and assisting us in many ways over the past ten months. Although three of the key individuals we worked with have departed-Dr. Schmidt, Dr. Cohen, and Mr. Cutting-we are already convinced that the new Superintendent will be equally as helpful in our future efforts.
Like all school districts in California and most districts in the nation, our District faces a very challenging financial environment. By appointing our Committee, you have shown that you consider the District’s financial well-being a top priority. It is our hope that you will carefully consider our recommendations. To the extent that we can assist you and the District staff, we are eager to do so.
IMPROVING FINANCIAL PLANNING AND MANAGEMENT
1. Strategic Planning. Although it has some of the constituent elements, the District does not have in place a modern, integrated strategic planning process. A working strategic planning process is absolutely essential for any high-performing organization, especially one operating in or facing a resource-constrained environment. We have observed that in operating without such a plan, the District addresses far too many important financial management matters in a reactive mode. The strategic planning process would assist the District in working in a proactive mode that permits more effective option formulation, more careful analysis, more extended community participation, and deeper Board deliberation. Properly designed and conducted, it would allow for action steps, deliverables, and an accountability system that would aid the District in moving toward its goals. As you recall, we urged you as part of our formal mid-year presentation to (1) renew your commitment to developing a sound process for translating a vision for the District into strategic objectives, plans, programs, and budgets, together with the program evaluation and feedback stages that are necessary to assure both effective and efficient operations, and (2) place special emphasis on this objective in the evaluation of candidates for the Superintendent position. We are delighted and encouraged that you have done both. Furthermore, we believe that Mr. Deasy has outlined an excellent process for moving forward and has identified a top-notch facilitator. We recommend that you maintain your commitment to and focus on this initiative and we are prepared to assist you and the Superintendent, as needed.
2. Reformatting of Financial Information for Important Management Requirements. We spent much of our first year wading through and understanding the specialized formats in which District financial information is collected, maintained, and displayed. State and County reporting requirements dictate most of these formats. However, while they are sufficient to meet regulatory reporting requirements, the District’s formats are not appropriate or adequate for other important purposes, the most pressing of which are strategic planning and interdistrict and intradistrict expenditure accountability. We have concluded that this is a significant weakness. Most high-performance organizations use a different set of reporting formats for financial and management purposes. Therefore, we have urged that the District take steps to improve its ability and means of getting better financial information from its raw financial data, beginning with the development of a program budget. Due to changes in personnel and a necessary switch to a new underlying financial system, there has been little progress in this area. We are hopeful, though, that the new system will provide the District with more flexibility to reshape financial data than the system it replaced. We recommend that you place a high priority on developing the necessary financial reports to meet the District’s strategic planning and accountability-system needs.
3. Creating a Community-Format Budget Display. Because community participation and support are so integral to a school district, in general, and an ongoing strategic planning process, in particular, it is essential that the sources and uses of revenues be available in a format that are readily accessible and understandable to broad segments of the community. Such a budget format could help a wider slice of the community understand, participate in discussing, and ultimately support some of the tough choices that will be clarified by the strategic planning process and that will have to be made and implemented in order to achieve the objectives of the plan. No such format currently exists. Therefore, we have recommended the development of a “community-format” budget display and have taken the initial steps to outline what such a display might look like. We recommend that you make an explicit commitment to charter the development of a “community-format” budget display, perhaps specifically charging the Financial Oversight Committee to take the lead on formulating the initial version and facilitating a subsequent transfer of responsibility to District staff.
4. Conducting a “Best Practices” Audit. The District is doing well in comparison with many other districts, but our community has the highest aspirations for our schools and you and the new Superintendent, through your actions and statements, have set a high bar for achievement and an ambitious course of improvement. Although we do not have the resources to conduct an in-depth inquiry into any particular District function, our work to date has led us to conclude that substantial improvements are feasible and desirable in at least several important areas, e.g., payroll procedures, invoicing, expenditure tracking and controls. We continue to believe that the Board should commission one or more independent performance audits that would assess the degree to which SMMUSD is employing best-practices in certain areas. There were no resources for this purpose reserved in the 2000-2001 District budget and thus it will be essential to make resources available during the 2001-2002 school year. To help prioritize the areas that would be the focus of the performance audit(s), Mr. Deasy is working with RAND to help it plan and conduct a “best-financial-practices workshop” that would expose him and SMMUSD financial-management staff to the practices of some of the nation’s and state’s leading districts. The workshop is scheduled for August 24 and RAND has secured the participation of both the Seattle and San Diego school districts, as well as several nearby districts. We endorse the Superintendent’s approach and we recommend that you both maintain your expectation that one or more independent performance audits be commissioned and completed during the 2001-2002 school year and be prepared to provide the necessary funding.
5. Budgeting of Labor-Related Costs. The Committee strongly believes that the District should alter its practice of not budgeting for the probable financial impact of labor negotiations. The current budget process allocates projected revenues to various programs with no allowance for salary-cost growth, and these programs are then cut back later when the results of the salary negotiations are known. Although this practice is in technical compliance with County requirements, it gives a misleading picture to the community of the financial condition of the District. We have heard the arguments in favor of this practice, but the Committee is not persuaded by them and believes instead that it is not a sound financial practice. We recommend that you adopt the practice of most other high-performing organizations and begin immediately to incorporate projections of changes in labor cost that will result from union negotiations and other factors into every budget.
6. Financially Analyzing Major Decisions. Many of the important decisions made by District management that affect the financial condition of the District should be preceded by a careful analysis of options. We suspect that the District does not use financial analysis to the extent it should (or, if it does, it has not been apparent to us). For example, the optimal student enrollment number each year should be preceded by an analysis of the marginal costs and marginal benefits per student. Taking into account projections of resident student attendance and facility capacity, this analysis would inform the District as to how many, if any, permit students should be enrolled. Financial analysis could substantially illuminate numerous other issues, including, for instance, the possible advantages of alternative approaches to the allocation of permits. Another example would be a careful and detailed “sources and uses” analysis that would estimate what revenues would be available and what expenses would be required if the District were to be divided (e.g., into Malibu and Santa Monica districts). Such an analysis would be helpful in determining whether or not to further explore a major issue. We recommend that you establish the expectation that critical decisions be preceded and informed by careful analysis. This Committee can assist in this process, e.g., by reviewing the analyses before they are presented to the Board.
STRENGTHENING REVENUE FLOWS
1. Pursuing New and Increased Revenue Sources. All possible sources of new and increased revenues should be explored and pursued, but several paths hold particular promise: additional increases in the parcel tax, grants for innovative programming from regional and national foundations (something on which the new superintendent has done very well in the past), private donations through the existing SMMUSD Educational Foundation, additional financial support from the cities, and a renewed partnership with businesses in our communities. Although the feasibility and desirability of moving down some of those paths have important political considerations that are outside of our purview, there are also numerous considerations of other kinds that could and should be the subject of investigation, perhaps by our Committee. We recommend that you make the careful and thorough exploration of each of these paths, as well as any others that offer the potential for adding a long-term source of new or increased revenues, a high priority for the superintendent and his staff.
2. Assessing Future Facility Needs. Given the passage last November of Proposition 39, reducing the percentage vote requirement necessary to approve a general obligation bond, it is the appropriate time for the board to begin considering future facility needs and the costs related thereto. We recognize that we are in the midst of construction under Proposition X, but it is our understanding that the district’s needs already exceed the planning under Prop X. We recommend that you give careful consideration to future facility needs and desires and to the optimal time for raising the necessary funds.
3. Improving Communication and Coordination Among Private Fundraising Activities. The District raises private funds in a variety of ways, including through PTAs, booster clubs, alumni associations, the Santa Monica-Malibu Education Foundation, and partnerships with businesses. These groups do not get full benefit from each other’s efforts. In fact, often lists of donors are specifically withheld between groups. Coordinating program goals and major donors where mutually beneficial would leverage the District’s ability to tap into private funds. We recommend that you foster an environment of cooperation among the fundraising arms of the District to produce more efficient and effective fundraising.
4. Increasing Community Involvement and In-Kind Donations. Improving communication with our communities, focusing on a positive relationship with our cities’ governments, and engaging our local businesses should assist the District in obtaining not only additional monetary donations, but non-monetary donations as well. Our region is blessed with tremendous resources and the District should be doing all it can to tap into that wealth. We recommend that you develop a wish list of monetary and non-monetary donations from our community and devise a plan for attracting those donations.
FUTURE ACTIVITIES OF THE COMMITTEE
Most of our first school-year of work involved familiarizing ourselves with the District’s financial operations and related issues. With that investment behind us, we believe that we can be helpful as the District continues to address its financial challenges. However, we have several suggestions that we believe will help increase our effectiveness and utility:
1. Focusing the Scope of the Committee’s Objectives. Our initial charter was broad and long. It provided flexibility for us to accomplish the necessary exploration and discussion to complete our familiarization and to enable us to make our initial recommendations. As we enter our second year, we recommend that you sharpen that charter so that the scope and boundaries of our purview are clearer and so that our limited time is focused on the subjects of most importance to the District.
2. Specific Clarification of the Committee’s Role(s) within That Scope. In the process of focusing the scope of our charter and helping us prioritize our activities, we recommend that you clarify what roles, if any, the Committee should have in at least (a) the strategic planning process, (b) the annual budget process, and (c) the analysis of the potential financial impacts associated with the District’s labor negotiations.
3. Follow-up on Financial Task Force Recommendations. The Financial Task Force that preceded us made 49 recommendations in four broad categories. Only a small fraction has been implemented and very few are being actively pursued. (See the enclosed summary for more detail.) We recommend that the Committee be specifically charged with increasing our attention to those recommendations, identifying those that are still relevant, and establishing a process for systematically tracking and reporting on the District’s implementation efforts.
My colleagues and I hope these observations and suggestions are useful. As always, we stand ready to discuss them further at an upcoming Board meeting, joint meeting, or other venue.
Sincerely,
Michael D. Rich, Executive Vice President, RAND
Chairman, Financial Oversight Committee
Santa Monica-Malibu Unified School District
Enclosure: Financial Task Force for Fiscal Year 1999-2000: Recommendations and Status
Members of the Financial Oversight Committee
Mr. John Deasy