Money Troubles

This was supposed to be a good year for the St. Vrain Valley school district. It began last fall with a new superintendent and a 7 percent pay raise for district employees. New graduation requirements, along with new strategies for meeting them, were being phased in. And on Election Day in November, local voters approved a $213 million bond to build 10 schools for the rapidly growing system.

Then came a bombshell: Just before Thanksgiving, district leaders here said they had found a nearly $14 million hole in the system’s $122 million budget. The 22,000-student district was broke, unsure even how to pay its employees.

Exactly how St. Vrain wound up in such a mess has yet to be fully sorted out. An investigation by the Boulder County, Colo., district attorney is under way. So far, no one has been accused of criminal wrongdoing. Instead, by most accounts, the problem lies in a tangle of budgeting errors that led people in the district to think they had more money to spend than they did.

Regardless of the specific cause of the mistakes, the district’s current leaders fault themselves for failing to exercise adequate oversight. They say they missed warning signs. They say they failed to ask follow-up questions. “If you’re not a financial person yourself, then you need lots of checks and balances in place,” says Randy Zila, St. Vrain’s schools chief for the past 11 months, who acknowledges that his own strengths lie in instruction, not finance. “You need lots of eyes on the budget.”

The cautionary tale is reverberating beyond this flat valley 90 minutes northwest of Denver. Prompted by the St. Vrain debacle, Colorado lawmakers have passed legislation requiring school systems to follow stricter budgeting procedures. Leaders of other Colorado districts have since approached St. Vrain to learn about policies it has put in place in the hope of never again winding up in such shape.

But the biggest lesson here is about the high price of weak financial controls. Gone are the pay raises. Programs meant to support instructional improvement have been gutted. Principals and other administrators have swallowed cuts in benefits that, for some, reduced their incomes by 15 percent or more. Money for field trips, staff training, and classroom supplies has evaporated.

“What we had was a 2003 Cadillac district,” says Mike O’Donnell, the principal of St. Vrain’s Hygiene Elementary School. “Now we’re a ’72 Bug.”

One of the greatest tolls has been the loss of community trust. Although parents and businesses have overwhelmed St. Vrain’s schools with donations in recent months, faith in the district’s top officials has plummeted. School board members say that—despite balancing the books with the help of a series of state loans—the system will need a tax increase in the near future. But with what they’ve just been through, few local leaders think one could pass any time soon.

Says Rick Samson, the school board’s vice president: “Any board that doesn’t look at its financial structure, based on what happened to us, is just stupid.”

In falling on hard times, the St. Vrain schools are hardly alone. In a year in which at least 21 states have cut spending on K-12 education, districts around the country are feeling pain—in some cases, compounded by their own mistakes. But St. Vrain isn’t the kind of place where, fairly or not, a major budget blunder might have been expected. It’s not an urban quagmire, nor is its school board fractious. Overall student performance compares favorably with achievement in the rest of the state.

As a result of consolidation in 1961, the district binds together 13 communities. Some are nestled in the foothills of the Rocky Mountains, others are surrounded by vast farmland, and a few sport brand-new homes with seven-figure price tags. With its dry climate and mountain vistas, the area has drawn enough high-tech companies of late to be called the Silicon Valley of Colorado.

“It’s a real hometown-U.S.A. kind of place,” says Sandi Searls, a St. Vrain school board member who moved here from Georgia with her family in 1992. “It’s the kind of place I chose because Friday-night football, or other school events, are still important in people’s lives.”

But as board members also found out, nothing sparks the fury of St. Vrain’s parents like the feeling that their schools are threatened. If meetings tended to draw fewer than five parents before, those held immediately after the deficit was found were standing room only. With police on hand, the televised events stretched hours longer than usual as residents vented their outrage. Some demanded the entire board resign.

District leaders found themselves facing a media frenzy. The local newspaper created special logos for its coverage of the debacle: an apple with a large bite out of it, and a schoolhouse sliced by a jagged, downward trend line that made it appear engulfed in flames. Samson, a lawyer, sometimes felt he was living a scene from a TV legal drama. “You have people shouting at you and shoving microphones in your face,” he says.

Both parents and staff members felt they had good reason to be angry. The district had announced the shortfall a week after the passage of the school construction bond, prompting some to ask if the problem was kept quiet so as not to undermine the bond campaign. It also didn’t help that the year before, the district had been caught up in charges of financial impropriety when a secretary to some of its top officials was accused of using district money to rack up some $25,000 in personal expenses.

Superintendent Zila and board members say that while they knew the budget was getting tight, they didn’t realize the size of the problem until after Election Day, when they say district finance officials first showed them they might be more than $10 million in the red.

To gauge the exact size of the problem, Zila asked a former St. Vrain superintendent, Roger Driver, to come back and investigate. Driver, a one-time Colorado superintendent of the year who retired in 1997, agreed to work for $1 a month, so long as the district also temporarily hired his former finance director, Joanne Harbert. Zila says bringing in Driver, an overwhelmingly trusted and popular leader, was the smartest decision he made after the deficit surfaced.

Though Driver wound up spending six months helping out, it took him and Harbert just six days to realize how bad things were. The system had been $855,000 in the red when the current budget year started last summer, and was headed for a $13.8 million deficit by the end of this July. All of its reserves were spent.

“Why they thought they could give those raises is a mystery to us,” Driver says. “They couldn’t afford any raises.”

To stop the immediate bleeding, Zila put a temporary halt to some middle school intramural sports and paid travel and tuition reimbursement for staff members. He also instituted a hiring freeze and slashed pay for substitute teachers.

But it’s the long-term cuts that most concern many district officials. Colorado’s state treasurer has approved $15 million in loans to St. Vrain since November, but only on the condition that the district agree to a plan to achieve financial recovery by July 2004. As a result, principals have been told to trim 20 percent from their operating funds—money meant for office supplies and for hiring substitutes to cover for teachers involved in staff development.

At the central office, the department of learning services was slashed to the tune of $1.16 million. Through retirements and shifting people around, no one is being dismissed. But the cuts mean the loss of such key positions as curriculum directors and instructional coaches for first-year teachers.

“A district can’t survive for long without purchasing textbooks, renewing the curriculum, or providing meaningful training,” says Russ Ramsey, the assistant superintendent for learning services. “It can go on for a while, but not long, without eroding the quality of instruction.”

Employees have paid a more immediate price. The recovery plan took back the raises given earlier in the year. It also killed a long-standing administrators’ perk that had paid for family members’ health insurance. And Sandy Ray, the president of the group that represents teachers’ aides, custodial workers, and food-service employees here, points out that because the school district is one of the area’s largest local employers, it’s not uncommon for both spouses to work for the system. Such families have been hit double.

“They’re feeling they bore the brunt of what we pay the administration not to let happen,” says Ray.

Agreement on precisely how all of St. Vrain’s errors began remains elusive. District Finance Director Walker Nielsen, who submitted his resignation just before news of the crisis broke, explained his view in a lengthy letter to the local newspaper last fall. He cited two glitches: undercounting the number of employees, and some salary increases that went beyond what financial officials had budgeted for.

Nielsen wrote that he first alerted superiors to problems two years ago, but claimed he was told he could overstate the district’s fund balance because “the budgets in the past reflected overbudgeting of expenses and underbudgeting of revenue.”

Nielsen couldn’t be reached for comment for this story. Nor could St. Vrain’s immediate past superintendent, Richard Weber, who retired last summer. Kathy Hall, the president of the St. Vrain school board, says Weber was hired for his instructional leadership and largely depended on others to handle budget matters. “He would tell you upfront that he’s not a financial guy,” she says.

Meanwhile, Nielsen’s boss, Kenneth Kirkland, the assistant superintendent for auxiliary services, also sought to resign. Rather than accept his resignation, though, the school board fired him. Kirkland says he’ll soon contest the termination in a lawsuit. He has signed an agreement with district officials pledging that neither party would publicly address during litigation what role he might have had in the budget issue.

“This district believes it has reason to terminate me,” Kirkland said in a recent interview. “I don’t believe they do. So it will take a third party to resolve that question. Once that question is resolved one way or another, maybe we can make inferences about responsibility.”

Regardless, many current district leaders now say they should have noticed signs of trouble. One was the borrowing of money from the state. Each year, Colorado gives districts no-interest loans to tide them over until revenue from local taxes comes in. Usually, systems ask for those loans in the middle of the school year, but this past year, St. Vrain borrowed its first $5 million in August, and took out additional $2 million state loans in each of the next three months.

“That should have been key to us,” says Samson, the board vice president.

A red flag also should have gone up when the previous budget showed one amount as its ending balance, but the current year’s budget showed a much bigger beginning balance. Vody Herrmann, the director of school finance at the Colorado Department of Education, says the discrepancy should have raised the question of where the money suddenly came from.

St. Vrain also treated funds set aside for teachers’ summer paychecks as reserves to be tapped for other expenses earlier in the year, says Herrmann, who calls the move a dangerous practice. Still, Herrmann sympathizes with the St. Vrain board. “The boards of education have a thankless job. They don’t get paid for what they do; they’re supposed to know all, be all, and do all,” she says, adding: “I think there needs to be better education for school board members out there all over the nation on this.”

Members of the St. Vrain school board maintain they did ask questions, but sometimes were too accepting of the answers. Many say they felt little reason to doubt information coming from officials under former Assistant Superintendent Kirkland, who boasts an impressive resume of finance-related jobs.

Board President Hall says she knew the district was eating into its reserves, but maintains she never was told how urgent things were. “The accountability system was not strong enough,” she says, “to ensure that when we were told, ‘We can work through this,’ that we also said, ‘Demonstrate how.’ ”

To head off such calamity in the future, St. Vrain has placed numerous new sensors throughout its budgeting process. The school board gets detailed, monthly financial reports that spell out cash flow and debt status. The board appointed an audit committee, including local residents with backgrounds in finance, to lead a project to analyze the district’s overall financial procedures. Another citizens panel that also includes district staff members has been formed to offer suggestions on planning future budgets.

The system has contracted with a new auditing firm, and made clear that any concerns should be brought directly to the school board. All staff members who manage budgets—such as principals and program directors—regularly exchange information with the finance department to make sure spending is on track. And after a national search, the district hired a new top financial officer last month.

“When this is all said and done,” says the state education department’s Herrmann, “they probably will be one of the best school districts in the state in terms of financial controls.”

Once the balance sheet gets back in the black, however, district leaders know they’ll still be on shaky ground for a while. They worry about the effect of weakened support for instruction at a time when Colorado is ratcheting up accountability for student performance in its public schools.

And restoring confidence in the system, says Hall, will take more time. The best hope that some here have is that a local tax hike might pass sometime after next fall, when, because of term limits, a majority of the current school board members will be replaced.

Of trust, says Hall: “You can lose it in a minute, and it takes years to get it back.”

Coverage of leadership issues in education—including governance, management, and labor relations—is supported by the Broad Foundation.