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Report Number: 2017-104

Montebello Unified School District
County Superintendent Intervention Is Necessary to Address Its Weak Financial Management and Governance



Summary

HIGHLIGHTS

Our review of Montebello's financial practices and overall governance revealed the following:

Results in Brief

The Montebello Unified School District (Montebello), which serves approximately 28,000 students in Los Angeles County, has been the subject of public scrutiny in the face of its worsening financial situation and the danger of financial insolvency. The poor financial stewardship by the Montebello Unified School District Board of Education (board) has endangered Montebello's financial stability and calls into question whether the district can overcome the projected decline in its funding. Specifically, the board has failed to take appropriate action to contain increasing costs despite shrinking enrollment, the primary driver for Montebello's funding. The board has also continually ignored warnings from its oversight agency—the Los Angeles County Office of Education (LACOE)—which has repeatedly urged it to curtail deficit spending. Instead, the board has continued to approve budgets in which expenditures exceeded revenues. In August 2017, LACOE rejected Montebello's fiscal year 2017–18 budget because the district projected an inability to meet its financial obligations in fiscal years 2018–19 and 2019–20.

Contributing to its financial challenges is the fact that Montebello exercised poor governance by failing to consistently follow its hiring processes and by employing individuals in extraneous high-paying positions. Specifically, the district failed to follow its hiring processes, such as advertising job postings and performing interviews, for eight of the 10 individuals we reviewed, most of whom occupied high-ranking positions. In doing so, Montebello did not ensure that it hired the most suitable executives and managers. As a result, our review determined that Montebello hired some employees into positions for which they did not meet the minimum qualifications. For example, Montebello hired its chief business officer (CBO), a high-ranking position overseeing Montebello's roughly $300 million budget and earning more than $186,000 annually, even though he did not meet the education‑related minimum qualifications. In addition, Montebello employed individuals in extraneous, high‑paying positions. For instance, Montebello employed two highly paid executives with similar responsibilities who acted as co‑superintendents.

Moreover, Montebello did not ensure the proper oversight of millions of dollars in bond funds, putting these funds at risk of abuse. Montebello's school bond funds can be used for activities such as the construction or replacement of school facilities and, as of December 2016, Montebello had more than $100 million to spend related to its two primary bonds. State law requires the board to establish and appoint members to an independent citizens' oversight committee (bond committee), which informs the public about the expenditure of bond funds and actively reviews and reports on the proper expenditure of taxpayers' money. However, the bond committee did not meet as often as required, and Montebello did not provide the committee with the required expenditure information, which inhibited the bond committee's ability to effectively safeguard millions of taxpayer dollars. In fact, we found that Montebello may have inappropriately paid for salaries using bond proceeds, as there is no documentation showing how the work of these employees related to bond projects. Further, Montebello failed to ensure that its employees did not have conflicts of interest when they approved expenditures and contracts related to the bond funds.

Also of concern is Montebello's lack of oversight of its expenditures, which led the district to waste public resources during this period of financial distress. Specifically, Montebello has not provided effective oversight of the purchase and use of equipment, leading to waste and to potential abuse of district resources. For example, of the 200 computers Montebello purchased in May 2016, it could not locate 13 computers, 162 computers were unopened in a warehouse for more than a year, and the remaining 25 computers were unboxed in a classroom but were not being used. Additionally, Montebello cannot verify that certain other purchases were related to district business. In our review of purchase card expenditures, for example, we noted that employees failed to provide the required receipts for their charges, including payments to PayPal, Domino's, Target, and Amazon. Further, overtime payments more than doubled from fiscal years 2013–14 through 2015–16 because the district failed to monitor employee overtime. For instance, Montebello allowed one employee to receive $84,000 in overtime, essentially doubling his salary.

Lastly, the Montebello adult education program (adult program) imprudently managed two of its revenue sources—state funding and student fees—at the expense of the community that it serves. The adult program likely inflated its enrollment, a factor the Los Angeles Regional Adult Education Consortium (consortium) used to determine how to allocate state funding for adult schools in the Los Angeles region. The consortium is a governing body with members representing four school districts and a community college district. In addition, the adult program allowed classes to proceed despite low attendance. Finally, we found that an average of more than $60,000 per year in student fees were at risk of misuse because the adult program failed to implement even the most basic cash collection procedures.

Taken as a whole, the concerns raised in this report call for significant change if Montebello is to avoid financial insolvency and regain the public's trust. Based on our analysis and absent significant changes, Montebello could be at risk of state intervention. To avoid the serious consequences of state intervention, the Los Angeles County superintendent (county superintendent) should take immediate actions to reverse Montebello's current trajectory, such as helping the district to justify its workforce size and cost compared to its enrollment projections.

Summary of Recommendations

Los Angeles County Superintendent

To ensure that Montebello takes the steps necessary to meet its financial obligations, the county superintendent should direct Montebello to submit a corrective action plan, develop a workforce plan, and implement all of the recommendations detailed below.

Montebello

To improve its current financial condition and ensure future viability, Montebello should, within 60 days, revise its fiscal stabilization plan and make the necessary cuts to fund its ongoing commitments.

To ensure that Montebello hires the most qualified executives and managers, the district should immediately adhere to its policies for hiring employees, including screening candidates to ensure that they meet the minimum qualifications. In order to rebuild trust with its community, Montebello should fill any vacant executive positions through a competitive hiring process to ensure that it hires and retains the most qualified and talented leaders.

To ensure that Montebello creates employee positions only when necessary, it should create a policy within 30 days that requires a justification for why the district is creating a position.

To ensure that bond funds are spent appropriately, Montebello should immediately ensure that its bond committee meets at least once per year and ensure that the district periodically provides the committee with detailed bond expenditure information.

To ensure that staff who are making decisions are free from perceived or actual conflicts of interest, Montebello should immediately amend and adhere to its policy requiring employees to file statements of economic interests.

To ensure that Montebello spends its funds for allowable and reasonable purposes, it should justify salaries paid with bond funds, implement an inventory tracking system, require approvals for overtime, and require receipts for all purchase card expenditures.

To ensure that state adult education expenditures are reasonable and justified, the board should develop a policy within one year to cancel classes if attendance falls below a certain threshold and require the adult program to annually report to the consortium and the board on the accurate number of students in classes.

To improve the cash collection process for the adult program, within 60 days Montebello should implement policies and procedures that align with best practices for cash collection and cash deposits.

Consortium

To ensure that state adult education funds are used in the most efficient and effective manner, within one year the consortium should determine if it is necessary to recalculate the adult program's fund allocation going forward and develop policies to ensure proper collection and reporting of data used for funding decisions.

Agency Comments

Montebello and LACOE agreed with our recommendations. The consortium stated that it had concerns with implementing one of our recommendations.




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