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California State Auditor Logo COMMITMENT • INTEGRITY • LEADERSHIP

Alum Rock Union Elementary School District
The District and Its Board Must Improve Governance and Operations to Effectively Serve the Community

Report Number: 2018-131

Introduction

Background

The Alum Rock Union Elementary School District (district) was established in 1930 in the eastern portion of the city of San José. For the 2018–19 academic year, it has served 9,700 students in 25 elementary, middle, and K–8 schools. The district is governed by a board of trustees (board), which consists of five members whom residents within the district’s boundaries elect. From December 2014 through November 2018, the same five members served on the board. In November 2018, after this audit started, two new board members were elected; they began serving their terms in December 2018. Following the resignation of a third board member in December 2018, the board appointed another individual in February 2019 as her replacement.

District policy assigns the board responsibility for establishing the strategic direction of the district, for ensuring educational and fiscal accountability to the community, and for providing support to the district’s superintendent and other staff as they carry out the board’s directives. The board is also responsible for hiring the superintendent, who is the only district employee who directly reports to the board. The current superintendent, who assumed her position in July 2014, oversees the day-to-day operations of the district’s 1,100 employees, including faculty, administrators, and support staff. Figure 1 shows the district’s organizational chart. The superintendent is also responsible for making policy recommendations to the board; establishing and maintaining positive community, staff, and board relations; and performing other duties as the board assigns.

Figure 1
The District’s Organizational Chart

An organizational chart identifying key management positions and operational functions in the district.

Source: District.

The Board’s Open Meeting Requirements

District policy directs the board to hold regular monthly meetings to conduct district business. The State requires these meetings to comply with the Ralph M. Brown Act (Brown Act), the State’s open meeting law, which the Legislature enacted to ensure that public agencies openly disclose and discuss their activities and deliberations. For example, the Brown Act requires the district to post an agenda for each regular meeting on its website and at locations freely accessible to members of the public at least 72 hours beforehand. In addition to regular meetings, the board may call special meetings. However, under the Brown Act, the district must distribute and publicly post the notice for each special meeting at least 24 hours in advance. The business that the board considers at special meetings and, with some exceptions, at regular meetings must be limited to those items it specifies in its posted agendas or notices.

Issuance and Oversight of the District’s Bond Funds

At its meetings, the board may authorize the issuance of bonds and approve payment for projects using bond funds. From fiscal years 2013–14 through 2017–18, the district had two active primary bonds: Measure J, which voters approved in 2012 for $125 million, and Measure I, which voters approved in 2016 for $140 million. As of June 2018, the district had issued $53.5 million of Measure J bonds but had not yet issued Measure I bonds. State law requires that these bond funds be used only for the construction, rehabilitation, or replacement of school facilities.

During these same fiscal years, the board approved more than 50 construction projects to be paid for with bond funds, such as restroom refurbishments and roof repairs. In order to execute these projects, the board approved contracts for construction management and for program management with the same company: Del Terra Real Estate Services, Inc. (Del Terra). However, as we discuss in subsequent sections of this report, the board voted to terminate its program management contracts with Del Terra in May 2018 and its construction management contracts with Del Terra in December 2018. Both roles were vacant as of early May 2019, and the assistant superintendent of business services stated that the district has not used bond funds to begin any new construction projects since terminating its contracts with Del Terra.

Bond Committee Membership

The bond committee consists of at least seven members and must include the following types of members:

Source: State law and district policy.

State law additionally requires the establishment of an independent citizens’ bond oversight committee (bond committee) to provide oversight and additional accountability for how a school district spends its bond funds. As the text box shows, state law and district policy specify that the bond committee must consist of at least seven volunteers representing a variety of stakeholders within the community. The bond committee meets quarterly to review financial information and the status of bond projects, as well as to ensure that the district does not spend bond funds on projects that do not align with the voter-approved purpose of the bonds. The bond committee is also responsible for preparing an annual report to the board regarding the results of its oversight activities.

Scrutiny Over District Governance and Operations

The Santa Clara County Office of Education (county office) has fiscal oversight of the school districts within Santa Clara County. The county office is responsible for providing management assistance, in addition to support and intervention, to ensure that its school districts are fiscally viable. It also takes specific actions if a school district is at risk of being unable to meet its financial obligations. In October 2016, the county office requested that the Fiscal Crisis and Management Assistance Team (FCMAT) conduct a review—referred to as an extraordinary audit—of the district. The Legislature authorized the creation of FCMAT with the passage of Assembly Bill 1200 (Chapter 1213, Statutes of 1991) to assist local educational agencies in meeting their financial obligations. A county office of education can request the assistance of FCMAT in conducting extraordinary audits of school districts and other local educational agencies in its purview.

FCMAT’s Scope of Work

Source: Audit agreement between FCMAT and the county office.

In this instance, the county office asked FCMAT to determine whether fraud, misappropriation of funds, or other illegal activities may have occurred at the district based on allegations that Del Terra had fraudulently invoiced the district for construction and program management services, including for projects that had not yet started. FCMAT published its extraordinary audit report on Alum Rock in June 2017 and determined that sufficient evidence existed in the areas it reviewed, which we list in the text box, to demonstrate that fraud, misappropriation of funds, or other illegal activities may have occurred. Appendix B presents the 52 recommendations FCMAT made to the district, which included ways that the district could correct deficiencies in its internal controls, construction management contracts, and program management contracts.

In addition to the recommendations it made directly to the district, FCMAT also recommended that the county office meet with the district to discuss rescinding the district’s fiscal independence status. The state superintendent of public instruction may authorize a school district’s fiscal independence from its county office of education, meaning that the school district can issue payments for its own expenditures and operate its own financial accounting system, rather than being dependent on the county office to provide these services on its behalf. Alum Rock had been fiscally independent from the county office since fiscal year 1992–93. However, the state superintendent of public instruction revoked the district’s fiscal independence effective July 1, 2017, because of the county office’s recommendation to do so based on the FCMAT report and other concerns.

Further, because of the concerns FCMAT raised in its audit report and of the county office’s concerns with the district’s financial assumptions in its fiscal year 2017–18 budget, the county office only conditionally approved the district’s fiscal year 2017–18 budget in September 2017. This budget projected that the district’s general fund revenue would be about $10.2 million less than its general fund expenditures. As a result, the county office informed the district of its concern that the district was depleting its financial resources. Although it fully approved the district’s budget in November 2017, the county office told the district that it would appoint a fiscal expert to oversee the district’s implementation of FCMAT’s recommendations and to manage the district’s efforts in addressing its financial issues. Specifically, the county office stated that the fiscal expert would help the district to clarify its budget assumptions, prepare its monthly cash reconciliations, and prepare its other financial documents. In January 2018, rather than appointing one person to this role, the county office designated a group of three fiscal experts to support the district in strengthening its financial and operational processes.

In spite of these appointments, the county office determined in March 2018 that the district was continuing to display signs of fiscal distress because its cash and debt service issues remained unresolved and because the district had requested an additional extension for filing its annual financial report, which was originally due in December 2017. In accordance with state law, the county office implemented stay-and-rescind authority—the power to halt any action that the county office determines to be inconsistent with the ability of a school district to meet its financial obligations for the current or subsequent fiscal year. In April 2018, the county office appointed a fiscal advisor—a different individual from the three fiscal experts—who had the authority to halt district actions on behalf of the county office. During the fiscal advisor’s tenure from April through December 2018, the county office used this authority once, in April 2018, to prevent the district from selling bonds until it improved its financial and operational practices. The county office subsequently reaffirmed its stay-and-rescind authority in August 2018. The county office informed us in May 2019 that its stay-and-rescind authority was no longer in force because it had approved the district's budget and determined that the concerns FCMAT raised in its audit report about bond sales were resolved.

Additionally, the district was the subject of a June 2018 report by the Santa Clara County Civil Grand Jury (grand jury), which began its review after receiving a complaint from a district resident regarding the actions of the board and after becoming aware of the concerns of FCMAT and the county office. The grand jury reported that during its review, the Santa Clara County Office of the District Attorney and the U.S. Securities and Exchange Commission began separate investigations of the district, which are still ongoing as of May 2019. The grand jury made nine recommendations to the district related to board governance, competitive bidding, and program and construction management services. Because of these pervasive and ongoing concerns, the Joint Legislative Audit Committee (Audit Committee) approved an audit of the district to address the board’s governance and the district’s operations, including its contracting practices.




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