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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

Audit Results

The Board's Poor Fiscal Leadership Has Put Montebello in Financial Peril

The board's poor financial stewardship has endangered Montebello's financial stability and calls into question whether Montebello can overcome the projected decline in its funding. Specifically, the board has failed to take appropriate action to contain increasing costs in the face of declining enrollment. Enrollment, or more specifically average daily attendance, primarily dictates the level of state funding for Montebello, its largest source of revenue. The board has also continually ignored warnings from its oversight agency, 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 it would be unable to meet its financial obligations in fiscal years 2018–19 and 2019–20.

Although Montebello has until now avoided losses in funding despite declining average daily attendance, it faces decreasing revenues in the future. As Figure 6 shows, from fiscal years 2013–14 through 2015–16, Montebello lost 1,687 in average daily attendance, decreasing from 28,494 to 26,807. As we discuss in the Introduction, average daily attendance greatly affects Montebello's funding because it primarily drives local control funding formula (LCFF) funding, the largest source of revenue for Montebello; as a result, Montebello's LCFF revenues will start to decline. We find this of concern because from fiscal years 2010–11 through 2015–16, Montebello's general fund expenditures increased, often exceeding its revenues.

Figure 6
Montebello's Average Daily Attendance Has Continued to Decline While General Fund Expenditures Have Increased and Often Exceeded Revenues

Further, Montebello projects that it will have insufficient reserves in fiscal years 2018–19 and 2019–20, endangering its financial stability. Districts accumulate and maintain reserves to mitigate volatility in funding, cover unexpected costs, and guard against insolvency, among other things. State regulations require all school districts to follow specific standards when developing their annual budgets, including maintaining a reserve for the current year and the two subsequent fiscal years equal to a certain percentage of their total expenditures, which is 3 percent for a district the size of Montebello. However, as Figure 7 shows, from fiscal years 2010–11 through 2014–15, Montebello's reserve declined from nearly 12 percent to 3 percent, just enough to meet the state reserve requirements. Although Montebello recovered some of the lost reserves, it still projects a steep decline in reserves in fiscal years 2017–18 through 2019–20. The projected reserves for these years range from 4 percent to a negative 12 percent, a level well below the regulatory requirement and insufficient to meet Montebello's financial obligations.

Figure 7
Montebello Projects That Its General Fund Reserves Will Significantly Decline in Future Years

The board's failure to follow the advice of its oversight agency, LACOE, has brought Montebello closer to insolvency. If Montebello were unable to meet its financial obligations for the remainder of a fiscal year or the subsequent fiscal year, the county superintendent, in consultation with the state superintendent, could veto any of Montebello's actions that were inconsistent with its ability to meet its obligations and could revise Montebello's budget. As Figure 8 shows, since 2010 LACOE has repeatedly warned Montebello and the board about the district's declining enrollment and deficit spending, and LACOE has recommended that Montebello set aside any projected increase in funding. In fact, LACOE has escalated its warnings about Montebello's deficit spending over the last seven years. It suggested in 2010 that Montebello's spending was not sustainable over the long term, and it alerted Montebello and the board in 2017 that it could soon become insolvent.

However, the board failed to heed any of LACOE's warnings and, instead, it approved deficit budgets. The Government Finance Officers Association recommends that school districts develop structurally balanced budgets, where recurring revenues equal or exceed recurring expenditures. Nevertheless, in six of the seven fiscal years from 2010–11 through 2016–17, the board approved budgets in which Montebello planned to spend more than it received, with annual deficits ranging from $3 million to $20 million. Further, the Government Finance Officers Association stresses the importance of evaluating financial performance relative to the adopted budget to detect potential problems and give decision makers time to address deviations from the budget. To comply with this, Montebello sends revisions of its budgets to LACOE twice a year. Instead of using that opportunity to correct its budgets, however, Montebello increased its deficits in those revisions in three of the seven fiscal years.

According to the board president, the board approved those proposed budgets based on what Montebello executives conveyed: that any deficits in the budget would be addressed that same fiscal year by adjusting operating activities in order to close the structural deficit. She also stated that the administration at the time did not provide the board with complete and detailed information about the extent to which the district's reserves would be used to help balance the budget. Regardless, according to its bylaws, the board is accountable to the community for its budget decisions and for Montebello's fiscal integrity. The bylaws also state that the board is to use accountability systems and processes in order to monitor Montebello's fiscal health. Thus, we question why the board approved these budgets without detailed budget information.

Figure 8
LACOE Has Been Warning Montebello About Declining Enrollment and Deficit Spending Since at Least 2010

The board took other actions that further contributed to Montebello's financial challenges. In May 2016, Montebello entered into a collective bargaining agreement, granting a bonus and permanent salary increases to its teachers. These commitments put further pressure on the district's finances at a most inopportune time to add ongoing obligations. Nevertheless, the board ratified this agreement. However, because Montebello failed to provide specific details on how it would fund the projected increase in compensation of $5.7 million in fiscal year 2016–17 and $11.6 million in fiscal year 2017–18, LACOE immediately requested that Montebello prepare a new fiscal stabilization plan to identify where it intended to make the corresponding spending reductions.

After the board failed to heed LACOE's repeated warnings, LACOE escalated its involvement with Montebello. Specifically, it contracted with a fiscal expert in February 2017 to assist Montebello in resolving its financial problems. In its March 2017 fiscal stabilization plan, Montebello committed to making $33.4 million in total spending reductions for fiscal years 2017–18 and 2018–19, mainly through staffing cuts. Around the same time, the board approved more than 300 layoffs. However, the board voted to rescind some of the notices of layoff and delegated the authority to rescind others to the superintendent, ultimately leading the district to rescind at least 200 additional notices, leaving Montebello without a feasible solution to its financial challenges. In August 2017, LACOE notified the board president that it was rejecting Montebello's board‑approved budget for fiscal year 2017–18 because Montebello had failed to implement the cost reductions from its fiscal stabilization plan. And because Montebello projected it would fall significantly below its required reserve levels in the following two years, LACOE requested a revised budget along with a new fiscal stabilization plan that would restore the district's reserves to the required levels. If Montebello does not promptly address these ongoing budgeting issues, LACOE could withhold its approval of the budget and assign a budget review committee to recommend the approval or disapproval of the proposed budget. In the event of disapproval, the budget review committee would recommend revisions to the budget that would enable the district to meet its financial obligations.

Montebello is considering other options to reduce the impact of declining enrollment and to avoid deficit spending. The interim superintendent stated that Montebello is reviewing all available options, including repurposing, restructuring, and as a last resort, closing down some school campuses and generating additional revenue through projects that can serve the community and the district, such as installing a billboard on a school campus. The interim superintendent also asserted that Montebello began creating a list of initiatives in 2017 to respond to declining enrollment. He added that Montebello is still in the process of creating the list of initiatives, but it has implemented some of the planned ideas. For example, the interim superintendent told us that Montebello has implemented an all-day kindergarten program as a way to increase enrollment.

We are concerned about the ability of the board and the district to provide effective fiscal oversight, considering that they have repeatedly made imprudent financial decisions and then failed to take responsibility for their actions. For example, in March 2017, in response to criticisms over layoffs, Montebello issued press releases stating that the previous boards and administrations were to blame for the lack of resources. Some of these press releases also emphasized that the board had to lay off Montebello employees in response to LACOE demands rather than admitting that its own actions had necessitated the deep cuts. In fact, each of the five current board members approved deficit spending at least once during his or her respective terms, which contributed to the lack of resources. These questionable actions, in combination with ignoring LACOE's continual warnings, cast doubt on the board's ability to act as an effective steward for the district and increases the need for external intervention as a solution to Montebello's financial woes.

Montebello's Leadership Hired Candidates Who Did Not Meet Minimum Qualifications and It Employed Individuals in Extraneous High-Paying Positions

Montebello exercised poor governance when it failed to consistently follow its hiring processes, which may have inhibited its ability to overcome its financial challenges. Our review determined that Montebello hired employees into positions for which they did not meet the minimum qualifications, including a high‑ranking position responsible for overseeing Montebello's roughly $300 million budget. In other instances, Montebello did not ensure that it hired the most suitable executives and managers. As we discuss in the Introduction, Montebello must conduct a competitive hiring process and formally appoint candidates to positions. However, Montebello failed to follow its hiring processes for eight of the 10 individuals we reviewed—four classified employees and four certificated employees. Five of these eight employees occupied high-ranking positions, which include directors and above as shown in Figure 9. Further, although salaries for Montebello executives were generally comparable to other school districts of similar size, we found that Montebello employed individuals in extraneous high‑paying positions.

Figure 9
Many High-Level Montebello Executives Hired From Fiscal Years 2013–14 Through 2015–16 Did Not Go Through an Appropriate Hiring Process

Sources: California State Auditor's analysis of Montebello's website, personnel files, job specifications, and hiring policies.

Montebello Inappropriately Hired Management Candidates Who Did Not Meet Minimum Qualifications

Montebello bypassed its established hiring policies and, as a result, hired certain individuals for management positions who did not meet the minimum qualification requirements for those positions. Minimum qualifications are the minimum amount of education or experience and the minimum levels of knowledge, skills, abilities, licensures, certifications, and other job-related requirements that must be met for a candidate to be considered for a position. As Table 3 shows, Montebello inappropriately hired four of the five classified employees we reviewed, including three provisional—or temporary employees, from fiscal years 2013–14 through 2015–16. State law defines a classified position as one that does not require a teaching or school services-related credential and that is not otherwise exempt from the classified service by state law. These classified positions may include directors, attendance officers, technicians, or custodians. Specifically, in 2015 Montebello hired a candidate who did not meet the minimum qualifications into the role of chief business officer (CBO), a high‑ranking position overseeing several departments and earning more than $186,000 annually. The CBO manages and supervises all financial aspects of Montebello, including supervising all responsibilities associated with accounting, auditing, finance, and investments, among other things. The CBO also oversees several departments, including the maintenance, operations, and facilities department, which in turn oversees millions of dollars in bond funds. Because the CBO had substantial financial responsibilities such as managing Montebello's budget of roughly $300 million, we question why Montebello did not follow its process to ensure that it hired a candidate who met at least the minimum qualifications.

Table 3
Montebello Hired Classified Employees Who Did Not Meet Minimum Qualification Requirements Into Positions With Substantial Authority and Key Financial Responsibilities From Fiscal Years 2013–14 Through 2015–16

	Position	Position's Annual Salary at time of hire	Hire Date	Montebello Advertised Job Opening	Montebello Ensured that Candidates Met Minimum Qualifications	Montebello Appropriately Interviewed and Ranked Candidates	The Board Approved the Appointment Based on Appropriate Hiring	As of September 2017 the Candidate was Employed In This Position
Classified Employees	Director of Maintenance, Operations, and Facilities Development	$146,220	7/1/2015	YES	YES	YES	YES	NO
	Chief Business Officer	186,479	6/1/2015	YES	NO	NO	NO	NO
	Position	Position's Annual Salary at time of hire†	Hire Date	Montebello Ensured that Candidates Met Minimum Qualifications	Employment Period Complied With the Legal Maximum of 126 Days*	The Board Approved the Appointment Based on Appropriate Hiring	As of September 2017 the Candidate was Employed In This Position
Classified Provisional Employees*	Departmental Finance Manager A	$84,444	4/8/2016	NO	YES	NO	NO
	Departmental Finance Manager B	84,444	4/8/2016	NO	YES	NO	NO
	Director of Procurement and Logistics	93,336	8/1/2013	NO	NO	NO	YES‡

Montebello failed to perform the appropriate screening before it hired the CBO. According to Montebello's policy, all applicants for classified positions must meet the requirements that are specified in the qualifications established for the position. However, the district failed to appropriately screen the education credentials of the individual it hired. The position's minimum qualifications require the CBO to have an advanced degree in a related field from an accredited university. However, rather than possessing an advanced degree from an accredited university in a business field, the chosen candidate cited on his application that he held a certificate in school business management and a law degree from a law school that is unaccredited. When we asked the director of classified human resources (classified director) why her staff did not screen out his application, she said that the law degree would provide legal expertise and the certificate in school business management coupled with experience working in public school business offices would provide the technical expertise. However, the minimum qualifications for the CBO position require knowledge of accounting principles and practices, budgeting, and other fiscal procedures as they apply to a school district. Although the certificate in school business management might cover some of these elements, it is not an advanced degree as required. Further, the reason for hiring someone who did not meet the minimum qualifications was not because of a lack of applicants. Montebello noted that of the 31 applicants for the CBO position, 10 applicants had a master's degree in business administration, which meets the minimum qualifications for an advanced degree in a related field, generally covering topics such as accounting, finance, and business operations.

In addition, the former superintendent and chief financial and operations officer (CFOO) recently filed a complaint alleging, among other things, other irregularities with the CBO's application, including that the CBO exaggerated his credentials, falsified letters of recommendations, and concealed his true employment history in order to secure employment with Montebello. Because audit standards prohibit us from auditing or reporting in a manner that could interfere with pending legal proceedings, we are not reporting on these matters.

Montebello also hired two departmental finance managers (finance managers) who failed to meet the minimum qualification requirements into provisional positions in April 2016, calling into question whether the individuals were qualified to perform their required duties. Although Montebello does not require that candidates for provisional positions go through the same recruitment process as those for permanent positions, its classified rules and regulations do require that applicants meet the minimum qualification requirements for temporary positions. Nevertheless, Montebello appointed two individuals that did not meet these qualifications. While the minimum qualifications required a bachelor's degree or higher, one candidate did not have a bachelor's degree at the time of her appointment. In addition, neither candidate possessed the relevant work experience in accounting or finance; instead, both listed their experience as being largely confined to customer service related to banking. Finance managers, generally mid-level managers, are responsible for managing and monitoring the financial and budget activities of Montebello's largest departments, including analyzing complex financial data and providing expert assistance and support to department managers. In fact, a human resources specialist initially determined that the two applicants failed to meet the minimum qualification requirements, noting that their experience was related to customer service instead of accounting or the higher‑level duties associated with financial decisions.

However, the classified director did not enforce Montebello's classified rules and regulations when the district hired these two candidates. When we asked her why these two applications were not screened out, she stated that the former CBO, who would be supervising these two positions, wanted her to hire individuals with banking sector experience and specifically recommended these two individuals. Montebello hired these individuals to help with bond‑related projects in addition to the duties of a finance manager. We do not believe the classified director should have allowed the CBO or any other official to influence the decision to hire individuals when they did not meet the minimum qualifications, and it casts doubt on whether Montebello was unbiased in making these appointments. The classified director is responsible for enforcing Montebello's merit system, which includes a requirement that applicants must meet all minimum qualifications for their position. The classified director acknowledged that Montebello should have only hired individuals who met the minimum qualifications.

In addition to the two finance managers, Montebello also hired a director of procurement and logistics in August 2013 as a provisional appointment even though he did not have experience related to procurement as the minimum qualifications required. Further, he was allowed to stay in his position for more than 200 working days in fiscal year 2013–14, well beyond the maximum length allowed. State law restricts provisional appointments to 90 working days or up to 126 working days in any one fiscal year with a justification. When we asked about this apparent exception, the classified director told us that Montebello should have treated his appointment as an out-of-class assignment—a temporary assignment to perform duties and responsibilities that are beyond the scope of duties normally assigned for the employee's position. Nevertheless, according to the board minutes, the board approved his appointment as a provisional employee. Also, as shown in the text box, Montebello extended his provisional appointment twice. Then the district changed the appointment from provisional to limited-term over the course of almost two years before permanently appointing him to the position in 2015. When Montebello extended this appointment, it denied others the opportunity to compete for the position and gave the appointee an unfair advantage in being chosen for that position.

Moreover, Montebello has not provided the personnel commission with enough information for it to effectively serve as one of the district's key checks and balances. As we discuss in the Introduction, the personnel commission ratifies the names on the eligibility list from which Montebello hires classified personnel. However, for the two permanent employees we reviewed, the personnel commission approved the lists without receiving information about how the candidates' education and experience met the minimum qualifications. The chairperson of the commission indicated that the commission formerly "rubber stamped" the eligibility lists. However, he indicated that beginning in July 2017, the commission has started to request more information about the qualifications of the individuals on the eligibility list.

Further, the personnel commission does not review provisional appointments because it is not required to, except in cases where it is extending a provisional appointment. Nevertheless, the personnel commission is responsible for ensuring the selection and retention of classified personnel based on merit and fitness. Given this responsibility and because Montebello appointed three provisional employees that did not meet the required minimum qualifications, we believe the personnel commission should review all provisional appointments.

Montebello also failed to provide—and the board did not ensure that it received—enough information to assist in the decisions to approve appointments for high-ranking positions. According to board policy, for each position, the superintendent or designee recommend one candidate to the board that must meet all qualifications established by law and the board. It further states that no person shall be employed by the board without the recommendation or endorsement of the superintendent or his or her designee. Also, for classified employees, the classified director must certify that the final selection—made after candidates from an eligibility list are interviewed—is in accordance with classified rules and regulations. Nevertheless, the board approved all three of the high-level classified management positions we reviewed, including the CBO, without being provided information on the individuals' education and experience. The interim superintendent indicated that Montebello should provide the board with a packet of background and qualifications information when considering high‑ranking appointments. However, he indicated that to his knowledge this has not been the practice in the past. Further, according to the board's policies, the board is committed to employing qualified individuals to carry out the district's mission. Therefore, we believe the board should have been provided or ensured that it received the qualifications for these individuals when making its hiring decisions because they were high-ranking and critical to the district's leadership team. If Montebello does not provide enough information for its governing body to make sound decisions, the system of checks and balances is rendered ineffective.

Montebello Also Hired Certificated Employees, Including High-Ranking Executives, Without Ensuring That They Were the Best Candidates

Montebello hired some certificated employees, including several high-ranking executives, without a fair and competitive hiring process. We reviewed Montebello's hiring of five executive and management employees, including the former superintendent, the former CFOO, and the assistant superintendent of human resources. These certificated leadership positions are responsible for the overall management and administration of Montebello. As Table 4 shows, Montebello did not conduct a competitive hiring process—such as advertising job postings, ensuring that candidates met minimum qualifications, and performing interviews—for four of the five certificated positions, including one case in which it could not provide adequate documentation to support the hiring by an external executive search firm. The law requires certificated positions to be held by persons who possess credentials issued by the California Department of Education; these positions can include teachers, school counselors, or certain school administrators. The board's own policies regarding certificated positions require the superintendent or designee to advertise job announcements to ensure a wide range of candidates. Those policies also require the selection process to include screenings, interviews, observations, and the review of recommendations from previous employers, as necessary, to identify the best possible candidates. However, Montebello did not always perform appropriate recruitment, which may have contributed to its ineffective governance structure and compromised its effort to recover from its weakened financial condition.

Table 4
Montebello Hired Certain High-Ranking Certificated Executives Without Advertising the Positions or Performing Screening and Interviews From Fiscal Years 2013–14 Through 2015–16

	Position	Position's Annual Salary at time of hire	Hire Date	Montebello Advertised Job Opening	Montebello Ensured that Candidates Met Minimum Qualifications	Montebello Appropriately Interviewed Candidates	The Individual Met Minimum Qualifications	The Board Approved the Appointment Based on Appropriate Hiring	As of September 2017 the Candidate was Employed In This Position
Certificated Employees	Chief Financial and Operations Officer	$256,504	7/1/2015	NO	NO	NO	YES	NO	NO
	Assistant Superintendent of Instructional Services	165,949	6/16/2014	YES	YES*	YES	YES	YES	YES
	Assistant Superintendent of Human Resources	179,217	7/1/2016	NO	NO	NO	YES	NO	YES
	Superintendent of Schools	265,000	7/1/2015	YES	NO†	NO†	YES	NO†	NO
	Assistant Director of Community Relations and Litigation Support	121,824	4/22/2015	NO	NO	NO	NO	NO	NO

Specifically, Montebello did not ensure that two of its highest-ranking leaders were the best candidates. The board hired the assistant superintendent of human resources and the CFOO without disseminating job announcements or performing interviews as required. Even though we verified that these two executives met the minimum qualifications, Montebello hired them without advertising the positions or performing screenings to make sure they met the applicable minimum requirements and conducting interviews and thus, did not ensure that it obtained the best individuals to fill these leadership positions. Similarly, Montebello could not demonstrate that it conducted a competitive hiring process when appointing the former superintendent of schools to her executive position in 2015, and it appointed the assistant director of community relations and litigation support without following any hiring process at all.

The assistant superintendent of human resources and the board president provided conflicting views on their respective roles in the hiring process. When we asked the assistant superintendent of human resources why Montebello appointed individuals into these leadership positions without conducting a competitive recruitment, he stated that the board ultimately has the authority and prerogative to promote individuals as it sees fit. However, the board's president said she understood the individuals presented to her had gone through the appropriate hiring process. She also said that she relies on the recommendations made by Montebello executives. Nonetheless, the board's policy states that it is committed to employing suitable, qualified individuals to carry out the district's mission to provide high-quality education to its students and to ensure the efficient running of Montebello's operations. We believe both appropriate Montebello staff and the board should take responsibility for their respective roles in Montebello's hiring process to avoid the flaws we found. In order to rebuild trust with its community and to ensure that it obtains the most qualified and talented leaders, Montebello needs to adhere to its policies and fill its executive positions through a competitive hiring process.

Montebello Employed Individuals in Extraneous Highly Paid Positions

Montebello created some high-paying positions that may not be in its best interest. In comparing its compensation of executives to those of other school districts, we determined that Montebello had two executive positions that are not common and that may have been unnecessary. Although Montebello's compensation for its most common positions is generally comparable to other districts, as Figure 10 shows, Montebello also employed a deputy superintendent and a CFOO—two executive positions that are not common among the four comparable districts. The total annual salary for these two positions is about $456,000. The deputy superintendent, who was paid an annual salary of nearly $200,000, separated from the district in March 2016 and, according to the interim superintendent, Montebello does not plan to refill this position.

Figure 10
Montebello Had Two Extraneous Positions In 2015 That Were Not Common Among Comparable Districts

We also found that the CFOO position was duplicative of the superintendent; in fact, these two highly paid positions had nearly identical job responsibilities. The text box shows two examples of the similar job duties of the two positions. Moreover, we found it curious that many of the CFOO's duties were not financial in nature as his title would suggest. Montebello employed these two highly paid executives with similar responsibilities because the two positions had formerly acted as co-superintendents. As Figure 11 shows, the co‑superintendent model started as early as 2010 when the former superintendent resigned. At the time, Montebello appointed two interim superintendents who were to keep their former duties and share the responsibilities of the superintendent; they were each contracted to receive $189,000 annually. We spoke to the longest‑standing board member and he indicated that Montebello created co-superintendents as a cost‑saving measure because it did not backfill their previous positions—the assistant superintendent of pupil and community services and the director of adult school and liaison to the board. However, two months after the co‑superintendent appointments, Montebello backfilled the position of assistant superintendent of pupil and community services with an employee contracted to receive $158,047 annually. Montebello's arrangement for co‑superintendents continued until July 2015 when its board appointed one of the co‑superintendents to the CFOO position and the other co‑superintendent as superintendent, increasing both salaries from approximately $200,000 to more than $250,000 per year.

Figure 11
Montebello Employed Co-Superintendents Starting in June 2010

Sources: Montebello employment contracts and other personnel records.

However, Montebello did not justify its need for a CFOO position. The classified director indicated that the teachers' union had complained to Montebello about wasting money on two co‑superintendents and Montebello created the CFOO position to appease the union. Nevertheless, the CFOO had the same job duties and was responsible for overseeing the same areas as before. Although the CFOO position was vacant starting in November 2016, Montebello indicated it does not intend to fill the CFOO position again. In fact, the interim superintendent did not think Montebello needed co-superintendents and was surprised Montebello had hired more than one. Montebello's overuse of executive positions is wasteful, especially in light of its financial struggles.

Montebello's Hiring Policies Are Insufficient to Protect Against Favoritism and Conflicts of Interest

Montebello could strengthen its policies to protect against favoritism and conflicts of interest when it hires certificated and classified employees. While Montebello's current hiring policies for both classified and certificated personnel focus on the issues of employment of immediate family members and their direct reporting relationships in the workplace, those policies do not address potential conflicts involving family relationships in the hiring process. Other public entities prohibit their employees from engaging in the hiring process, such as participating on a rating panel, or screening and interviewing candidates for a position if a relative has applied. Montebello's nepotism policies contain no such prohibition and also do not address other personal relationships of those involved in the hiring process. In addition to addressing family relationships, guidance from the California Department of Human Resources indicates that agencies should have policies that define what other types of personal relationships fall under their nepotism policy, which work relationships the nepotism policy applies to, and what factors to consider when evaluating the potential impact of other personal relationships. If Montebello does not improve its hiring policies, it cannot ensure that its hiring decisions are free from bias or favoritism.

Montebello's Lax Oversight Puts Millions of Dollars in Bond Funds at Risk of Abuse

Montebello's school bond funds can be used for the construction, reconstruction, rehabilitation, or replacement of school facilities, including the furnishing and equipping of school facilities. Montebello primarily has two active bonds as of June 30, 2016: Measure M, approved in 2004 for $98 million, and Measure GS, approved in 2016 for $300 million. As discussed in the Introduction, as of December 2016, Montebello had more than $100 million available to spend from those two bond measures. State law establishes protections for bond funds to prevent abuse and the waste of taxpayer funds. For example, state law requires the governing board of a school district 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 for school construction.

According to the bylaws of Montebello's two bond committees, each committee was to meet at least once per year. However, because Montebello's first bond committee—created in 2005 to oversee the Measure M bond—did not meet from October 2013 to March 2017, when Montebello created a new bond committee, the district increased the risk that the bond funds may have been spent for inappropriate purposes during that time. Montebello explained that the first committee did not meet because it struggled to recruit members and to keep the committee positions filled. Although Montebello posted an advertisement and sent a memo to the district community to attract potential bond committee members in May 2014, the interim superintendent was unaware of any other attempts to recruit committee members after that. He agreed that Montebello did not do its due diligence to ensure that the bond committee met.

Montebello created a new bond committee after voters approved the Measure GS bond in 2016 to oversee both the unspent portion of the Measure M bond and the new Measure GS bond. Since its creation, that bond committee has met three times as of September 2017: once to determine the meeting schedule and discuss the conduct of committee officers and twice to provide an overview of the preliminary budget, budget changes, and the projects to be funded under Measure GS. However, the committee did not discuss detailed expenditure information related to either bond measure, inhibiting its ability to effectively safeguard millions of taxpayer dollars. State law requires Montebello to provide the committee with any necessary technical and administrative assistance to further the committee's purpose. Montebello asserted that a construction project management company under contract with the district was responsible for providing support to the committee. Montebello's contract with the company requires it to attend bond committee meetings and provide monthly progress reports as requested by Montebello. The contract also states that the contents and details contained within such reports shall be defined and agreed upon by the company's staff and Montebello. When we shared this contract language with Montebello, it claimed it was unaware of its requirement to instruct the company on what to provide to the committee.

In addition, the state constitution requires the board to have an annual, independent performance and financial audit (bond audit)conducted for the proceeds from the sale of the bonds until all of those proceeds have been spent for school facilities projects. The board contracts with a private CPA firm (auditors) to perform the audits. However, as of September 2017, Montebello has yet to release the fiscal year 2015–16 bond audit to the public. When we asked Montebello about the delay, the interim superintendent claimed that the bond audit is the business services department's responsibility, and the former CBO and CFOO did not ensure that the audit was performed. However, this response does not explain why the same auditors completed the required audit of Montebello's financial statements for the same fiscal year in May 2017 but not the bond audit, as Montebello contracted for both audits in January 2017. State law requires that the auditors submit the previous year's bond audit to the oversight committee at the same time the bond audit is submitted to Montebello but no later than March 31 of each year. Because of the delay in completing the bond audit, Montebello and the public it serves could be unaware of the potential for fraud or other serious issues related to the millions of dollars in bond funds. As we discuss later, we have concerns about certain expenditures related to Montebello using bond funds for salaries.

Further, Montebello failed to ensure that its employees who approve expenditures and contracts related to the bonds did not have conflicts of interest. The maintenance, operations, and facilities development department, which is in charge of projects funded by bond proceeds, approves expenditures and participates in awarding contracts. Because Montebello had millions of dollars available to spend on these bond projects as of December 2016, it is important that all employees involved in making decisions or influencing decisions relating to bond projects disclose their economic interests. State law requires all public agencies, including Montebello, to adopt a conflict of interest code that identifies the positions within the agency that involve the making or participation in the making of decisions which may foreseeably have a material effect on any financial interests. Individuals hired into or occupying such positions are required to file statements that disclose their reportable investments, business positions, and interests in real property and income within 30 days of being hired, annually thereafter, and within 30 days upon leaving the agency.

However, Montebello failed to ensure that all those employees required to file disclosure statements did so. Therefore, Montebello could not be certain that such employees did not have conflicts of interest when they approved expenditures and contracts. We reviewed a selection of 21 individuals in positions at Montebello that are required to submit a disclosure statement during our audit period and found that the district was missing forms for 14 of those individuals. Of those 14, four individuals were working in departments that make decisions related to bond funds and six were responsible for approving contracts that could be related to bonds. Additionally, some individuals' disclosure statements were not completely filled out, such as failing to indicate on the form which financial disclosures were applicable, and some board members submitted their disclosure statements more than 30 days late. The interim superintendent indicated that he does not have the historical context to explain why this happened but asserted that Montebello would ensure the required employees file disclosure statements in the future.

Moreover, Montebello's conflict-of-interest policy is insufficient to ensure that all individuals who make or influence material decisions submit the required disclosure statements. State law prohibits all public employees from making, participating in making or in any way attempting to use their official position to influence a governmental decision in which they know or have reason to know they have a financial interest, such as making a decision regarding a contract or an expenditure that relates to a business entity in which the employee has an ownership or management interest. Nevertheless, Montebello's policy does not identify all the positions involved in the purchase, contract, and bid processes that could affect the financial interests of those holding such positions. We found four positions whose duty statements include involvement in the purchasing or contracting processes but that are not so designated and thus required by the policy to file a disclosure statement. For example, the facilities projects supervisor is not required to file a disclosure statement, but the job duties for that position include negotiating contracts, evaluating and processing construction disbursements, and acting as the district's owner or agent for assigned projects. Because the duties of this position include making decisions involving the expenditure of Montebello's money and potentially millions of dollars related to projects funded by bonds, Montebello should require the holder of the position to file a disclosure statement.

Montebello's Lack of Oversight Led to Misuse of Restricted Funds and Waste of Resources

Montebello's lack of oversight of its expenditures led to it improperly using restricted funds and wasting public resources during this period of financial distress. In fact, we found that Montebello may have inappropriately paid for salaries using bond proceeds with no documentation, such as time cards, showing how the work of these employees related to bond projects. Also, Montebello's overtime payments more than doubled from fiscal years 2013–14 through 2015–16 because it failed to monitor the use of employee overtime. Additionally, Montebello has not provided effective oversight of the purchase and use of equipment, leading to waste and potential abuse of Montebello resources. Finally, Montebello cannot verify that certain purchases were related to district business.

We reviewed expenditures made in fiscal years 2013–14 through 2017–18 from several funds, including the building fund, which includes proceeds from the sale of bonds; the adult education fund, which accounts for revenues and spending related to the adult education program; and the general fund, Montebello's main operating fund. Our review identified questionable expenditures made from all of these funds.

Montebello could not demonstrate that bond funds used to pay for employee salaries were used for bond-related purposes, which may be a misuse of taxpayer funds and a violation of the California Constitution. The constitution requires that bond proceeds, such as Montebello's, be used only for the construction, reconstruction, rehabilitation, or replacement of school facilities and not for any other purpose, including teacher and administrator salaries and other school operating expenses. The California Attorney General's Office has concluded that such bond proceeds may be used to pay the salaries of district employees to the extent that they perform administrative oversight work on construction projects authorized by a bond measure. However, we found that Montebello paid, at least in part, the salaries of four employees in fiscal year 2017–18, totaling nearly $19,000 for one month using bond proceeds from the building fund. Some of these employees held financial and accounting positions. Montebello paid these salaries with no documentation, such as time cards, showing how the work of these employees related to bond projects. If this trend continues, Montebello could pay about $228,000 for the four individuals we identified over the course of one year. Even more significantly, our review of the building fund's salaries and benefits funding plan for fiscal year 2017–18 revealed that Montebello planned to pay the salaries of other employees partially through use of bond proceeds instead of charging those expenses to the general fund, as it had in previous years. Montebello could not explain how it determined that portions of these salaries should be paid for using bond proceeds. This inability to explain its use of restricted bond proceeds raises questions about its compliance with the provisions of its bonds as well as with state law, and casts doubt on its ability to responsibly manage its new bond.

Another area of potential waste is Montebello's lack of an overtime pre-approval and oversight process which we believe may have led to rising overtime costs and likely allowed abusive practices. As indicated in Figure 12, from fiscal years 2013–14 through 2015–16, Montebello's overtime payments more than doubled from just less than $1 million to more than $2.3 million. During fiscal year 2015–16, Montebello allowed two employees to receive more than $84,000 and $58,000, respectively, in overtime compensation from the general fund, essentially doubling their annual salaries. In contrast, these employees received $8,700 and $2,400, respectively, in overtime compensation in fiscal year 2013–14. Because Montebello does not require employees to obtain approval before working overtime or to submit information about the work being performed during their overtime hours, it cannot effectively control overtime costs. In fact, when we inquired about the overtime these two employees worked, Montebello was unable to justify the purpose.

Montebello was also wasteful in spending adult education program (adult program) funds on computers it did not use. We reviewed a May 2016 purchase of 200 Dell computers totaling more than $215,000, and purchases from 2014 and 2015 of 24 Apple computers, three Apple iPads, and various Apple hardware and software totaling more than $50,000. As of August 2017, Montebello could not locate 13 of the Dell computers, 162 of them were stored unopened in a warehouse, and the remaining 25 were unboxed in a classroom but not being used. When we shared these concerns with Montebello, the director of adult education stated that the adult program has not had a full time employee to work on their technological needs and, as of October 2017, he was still working on hiring a full time employee to serve these needs. However, this is not a reasonable explanation of why Montebello would make a large purchase and then not ensure that it had staff to install the computers for more than a year. Montebello was also unable to account for 13 Apple computers and the three Apple iPads it purchased in 2014 and 2015, and the district's IT and procurement staff stated that they do not track the location of computers. The lack of a clear chain of custody and inventory control for equipment exposes Montebello to the risk of loss and theft.

Additionally, we found that Montebello misused at least $42,000 of adult program funds on expenses such as services for non‑adult education purposes. For example, Montebello used adult program funds to pay a consultant $2,100 to be a resource and liaison for special education district staff, parents, and students in Montebello when this was not an adult education activity. State law prohibits using the adult education fund for purposes other than adult education. Furthermore, according to Montebello's policy, it cannot use the adult education revolving fund account—which functions similar to a petty cash account—for items such as food, beverages, or staff awards. However, we found the adult program spent at least $3,700 on these types of items. Montebello agreed that it should not have used the fund in this way, and it plans to eliminate the revolving fund account.

Figure 12
Overtime Payments Have More Than Doubled From Fiscal Years 2013–14 Through 2015–16

Finally, Montebello cannot verify that certain purchases were related to district business. Montebello provides purchase cards to its employees as a cost-effective and timely method for purchasing goods and services. However, Montebello does not have a clear policy to restrict who has the authority to use purchase cards nor does it adequately monitor their use. In our review of purchase card expenditures from the general fund, we noted that employees failed to provide receipts for their charges as required by Montebello's policy, including payments to PayPal, Domino's, Von's, Walmart, Target, and Amazon. Without receipts, Montebello cannot verify that these purchases were related to district business. This is especially problematic as Montebello charged more than $750,000 in purchase card transactions in fiscal year 2015–16 alone. Montebello agreed that this is a problem and asserted that it would limit the number of purchase card users in the future. However, only limiting the number of users without requiring receipts for purchases will not address the risk of Montebello's employees making non-business purchases.

The Montebello Adult Education Program Likely Misrepresented Its Enrollment and Poorly Managed Its Funding

The Montebello 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 misrepresented 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. Further, Montebello's adult program allowed classes to proceed despite low attendance. We also found that an average of more than $60,000 per year in student fees were at risk because the adult program failed to implement even the most basic cash collection procedures. Ultimately, the consortium and Montebello need to increase their oversight of the adult program to ensure that it justifies its program needs and implements processes that ensure that staff properly collect student fees.

The Adult Program Likely Misrepresented Its Enrollment and Allowed Classes to Proceed Despite Low Attendance

The consortium distributed state funding among the adult education programs of its five district members in a manner that favored the Montebello adult program. As we discuss in the Introduction, the consortium's governing board made certain funding decisions related to adult education programs in Los Angeles for fiscal year 2015–16 that will likely affect the amount of funds apportioned to members in future years. Table 5 shows that the Montebello adult program received $15.5 million in state funding in that fiscal year, or $690 for each class in which a student enrolls. The table also shows that the consortium allocated more than double the amount of funding for Montebello students than it did for students in the Burbank and Culver City adult education programs. Moreover, the Montebello adult program received $15 more for each class in which a student enrolled than the largest district in California, the Los Angeles Unified School District (LAUSD).

Table 5
The Montebello Adult Education Program Received More Money Based on Enrollment in Fiscal Year 2015–16 Than Other Programs in the Los Angeles Region

Consortium Member	2015–16 State Funding (Dollars in Millions)	2015–16 Enrollment*	2015–16 Funding for each class in which a student enrolls
Montebello Unified School District	$15.5	22,479	$690
Los Angeles Unified School District	94.6	140,172	675
Burbank Unified School District	2	6,593	308
Culver City Unified School District	1.5	5,591	260
Los Angeles Community College†	7	151,064	46
Consortium Total	$120.6 ÷ 325,899 = $370

What's more, the Montebello adult program likely inflated the enrollment numbers it reported to the consortium. Its total enrollment count of around 22,500 in school year 2015–16 is based on counting each class in which a student enrolls rather than the number of students. For example, if a student enrolled in five classes, the count would be five. This method is called a duplicated count and is likely too high, as we discuss below. A second method that counts the number of people enrolling—an unduplicated count—yielded 18,315 students for that year but this number also may be high as discussed later. In July 2017, we surveyed 233 students from Montebello's two largest adult schools, Ford Park Adult School (Ford Park) and Montebello Adult School (MOA) and asked them about the number of courses they enrolled in and the amount they paid for those courses. For the 40 students who responded, we were able to identify that the adult program had 83 completed class enrollment cards. However, these students reported enrolling in only 43 classes, calling into question the remaining 40 enrollment cards. For example, one student stated on the survey and during a follow‑up phone call that she enrolled in three courses, yet we found eight different enrollment cards for her. In another example, in school year 2015–16, 473 of the 521 students we selected who signed up for on-campus English as a second language courses (ESL) were also enrolled in distance learning ESL classes. We expected that fewer students would have enrolled in both in-class and distance learning classes during the same school year.

If the Montebello adult program reported enrollment numbers that were higher than its actual enrollment, it had an unfair advantage when the consortium determined how to allocate its funding. According to the project manager for the consortium, the allocations of the 2015–16 need-based funding was loosely based in part on district enrollment. The consortium determined need-based funding via extensive negotiations among its members including school district representatives and a representative from the Los Angeles Community College District. When making the decision on how to allocate its funds, the consortium also discussed issues such as the amount of federal funding received by each program, the number of students on wait lists, and the total number of students in each district. However, when we reviewed consortium documents, we found it difficult to determine how the consortium used these criteria, including enrollment, to allocate funding. Regardless, if the Montebello adult program's enrollment numbers are actually lower than it reported to the consortium, it may be receiving more money to serve its students at the expense of other adult education students in the Los Angeles region.

We also have concerns regarding the reliability of the adult program's attendance data. After discovering through our survey the discrepancy between the number of classes students reported enrolling in and Montebello's enrollment records, we followed up with a review of the number of class sessions a selection of students attended. Seven students stated that collectively they attended 12 sessions. However, when we analyzed the attendance records for the class sessions as reported on Montebello's enrollment cards, we found that the teacher had marked those seven students as present in a total of 23 class sessions. One teacher for whom we identified record discrepancies asserted that she only marks students who are present in her class as attending, and was unable to further explain these discrepancies.

Moreover, the adult program does not ensure that it manages its resources prudently. Specifically, the adult program does not cancel classes when attendance is low. State guidance requires that adult education programs use funds prudently and efficiently and that expenditures be consistent with program goals and activities. The adult program's website claims that it may discontinue courses if attendance drops below an acceptable minimum number of students, which is a reasonable policy to ensure the efficient use of resources. However, according to Montebello's director of adult education, there is no board policy to facilitate cancelling a class due to low attendance. The adult program did not cancel at least 20 classes offered in the 2015–16 school year that had fewer than 10 students in attendance. In fact, according to the director of adult education, the adult program has never canceled a class because of low attendance. In contrast, LAUSD's union contract states that if attendance is fewer than 12 to 15 students, depending on the class, then LAUSD will cancel the class. When we informed the director of adult education that we believed the board should implement a minimum class size policy, he expressed concern that such a policy could become a union issue. Nevertheless, we do not consider this a valid reason for not establishing a reasonable minimum class size policy, especially considering that LAUSD's class size minimums are included in its union contract.

By teaching classes with a small number of students, Montebello's adult program is making a significant investment when another member of the consortium could have potentially used the funds to serve more students. Specifically, in the summer of 2015, Montebello's adult program offered 24 three-week summer school courses with up to 10 students attending. Based on the teachers' hourly salary rates alone, the adult program invested an average of $308 per student for these summer school courses. In one case, a teacher who made $57 an hour spent 312 hours teaching nine students, at a salary cost of $17,784. At $1,976 per student, this is $152 higher than a quarter's tuition of $1,824 for a California State University undergraduate student. Finally, as noted in the previous section, the adult program misused state funds by making unreasonable expenditures in other areas as well.

These issues suggest that the adult program may have received more funding to serve its students at the expense of other schools in the Los Angeles region. For example, when we shared our concerns about the enrollment and attendance data with the current director of adult education, he stated that he believes the actual enrollment numbers are closer to 12,000 to 15,000 students each year. These figures are much lower than both the enrollment and student counts—the duplicated and unduplicated counts—that the adult program reported to the consortium. The consortium project manager stated that although he recognizes that the consortium could increase its oversight of each district by doing things such as reviewing self-reported data, it is difficult to exert this oversight without a specific mandate from the Legislature, the California Department of Education, or the Board of Community Colleges. Nevertheless, state law allows the consortium to reconsider the funding levels if it finds that one of its members has been ineffective in providing services that address the needs identified in the adult education plan and reasonable interventions have not resulted in improvements. State law also requires that each consortium member's adult education plan include, among other things, an evaluation of the educational needs of adults in the region, an evaluation of services available, and actions the members will take to address those educational needs and improve the effectiveness of their services. The adult program's questionable enrollment numbers suggest that an evaluation is warranted by the consortium of the program's ability to effectively provide services. This is especially true given that funding levels for each consortium member will generally remain consistent into the future, absent a finding by the consortium, as we describe in the Introduction. The Montebello director of adult education stated he would take the steps necessary to justify the costs of the adult program, including implementing a new system to track enrollment and attendance. However, he told us he would also continue to advocate for the district to receive its current level of funding from the consortium.

The Adult Program's Poor Cash Collection Process Puts Student Fees at Risk of Misuse

Because its adult program lacks basic cash collection safeguards, Montebello adult education staff have the opportunity to divert student tuition and fees. As we note in the Introduction, students must pay for tuition and fees in cash only. The two schools we reviewed—MOA and Ford Park—both had inadequate cash collection practices. While Ford Park provides receipts to its students, MOA does not, which makes it very difficult to reconcile the cash collected with the number of students who enrolled at MOA. At the same time, while MOA deposits the cash collected into a cash register, Ford Park staff keep the money in envelopes in a locked desk drawer. In fact, Ford Park's cash register is kept in a storage room. Ford Park's cash collection also lacks proper separation of duties because one individual is generally responsible for collecting student tuition and fees, creating deposit slips, and reconciling the cash collected with the deposit slips. This lack of separation of duties provides the potential for one person to create and conceal the diversion of cash. In fact, the district's annual financial audit from fiscal year 2015–16 found that the district was at high risk for fraud because of poor internal controls, lack of supervision, and poor business practices, and it cited the adult program as one area for further examination.

Ford Park's process is particularly concerning because there are numerous opportunities for cash to be misplaced or misused in the cash collection process. Since Ford Park is the largest of the adult program's schools and collects thousands of dollars each year in student tuition and fees, we expected that management would have established strong cash collection procedures—such as ensuring the separation of duties—that would diminish the opportunity for misuse. However, as Figure 13 shows, from the time that a student pays tuition and fees through their deposit, multiple opportunities exist for staff to divert the cash. In fact, we found that management did not even fully understand the cash collection process that was currently in use. Ultimately, weak processes create opportunities for individuals to take advantage of those processes for personal gain.

Figure 13
Inadequate Cash Collection Safeguards at Ford Park Adult School Create Many Opportunities for Staff to Divert Student Tuition and Fees

Sources: California State Auditor's analysis of the Ford Park cash collection process and the Association of Government Accountants' risks, red flags, and best practices for detecting cash diversions.

Moreover, according to the office assistant who collects the cash, there is an informal policy whereby students do not pay for all classes in which they enroll. Specifically, she only charges students for one class a semester even if they are enrolling for multiple classes that require payment. Although the previous and current directors of the adult program were unaware of this informal policy, the previous director stated that this sounds like a policy she might have given permission for. This explanation highlights the importance of having a documented and consistent policy. Because tuition and fees are paid in cash and the policy is unwritten, there is increased risk that staff could charge a student for all of the classes, inappropriately record the payment amount for one class on the receipt, and keep the extra money collected. Moreover, because the office assistant did not collect and deposit the appropriate amount of tuition and fees because of this informal policy, some of Ford Park's classes are being unnecessarily subsidized by other funding sources.

Of further concern is the fact that we were unable to balance the cash the office assistant kept in her desk with the receipts she issued, which is a red flag for cash diversion. On two occasions, we went to Ford Park unannounced with the intent to balance the cash-on-hand to the amount the receipts she had collected. The first time, we found the school's cash was short by $6 out of $222. The office assistant claimed the difference occurred because she sometimes makes change out of her purse. On the second occasion, we determined that the school was short $40 out of $490 documented in the receipts. We subsequently observed the office assistant pulling $40 from her drawer and putting it in the envelope we had already determined was short. She then stated that the cash would balance. Although it is unclear whether any illegal activities occurred, we have concerns that such an environment creates the opportunity for cash diversion.

When we informed the director of adult education about our concerns regarding the lax cash collection process, he claimed that he would fix the process immediately by implementing new procedures. In September 2017 we received a copy of the new cash receipt policies that addressed our concerns with the process. For example, the new policy requires that all staff put cash into a cash register. The director of adult education also stated that he is in the process of implementing a new enrollment system that will allow students to enroll in courses online and pay for their tuition and fees with credit or debit cards.

Additional Oversight Is Necessary to Ensure That Montebello Implements Crucial Reforms

This report identifies numerous concerns, including Montebello's inadequate budgeting and hiring practices. These poor practices have contributed to Montebello's precarious financial situation, including the board's approval of annual budgets with expenditures that exceeded annual revenue in spite of LACOE's admonitions. Further, Montebello did not follow its hiring processes and it employed individuals in extraneous highly paid positions, which is indicative of poor governance. Taken as a whole, these problems and others we discuss call for significant change if Montebello is to avoid financial insolvency and regain the public's trust. To achieve these changes, we believe the county superintendent should immediately increase her oversight of Montebello.

Based on our analysis and absent significant changes, Montebello could be at risk of state intervention. Figure 14 demonstrates the state's processes for assuming the management of troubled school districts. Montebello projects that the district will not have enough cash to fund its operations beginning in fiscal year 2018–19, which may cause it to solicit funding from the State. If Montebello obtains an emergency loan from the State that is less than or equal to 200 percent of its recommended reserves, the state superintendent will appoint a trustee with expertise in management and finance who will monitor and review the operations of Montebello. That trustee will have the power to overrule any action by the school board that the trustee determines may negatively affect Montebello's financial condition. If Montebello obtains an emergency loan from the State that is more than 200 percent of its recommended reserve, the state superintendent will assume control of Montebello and appoint an administrator to act on his or her behalf at Montebello. This process—sometimes called state receivership—requires the state superintendent to assume all legal rights, duties, and powers of the district's board and forces the board to serve in an advisory capacity. The district must also bear the additional costs associated with the emergency loan such as paying for interest on the loan as well as the salaries and benefits of the trustee or administrator and his or her staff.

To avoid the serious consequences of state intervention, the county superintendent should take immediate actions to reverse Montebello's current trajectory. In 2017 Montebello had a qualified certification, meaning that it was at risk of not meeting its financial obligations for the current fiscal year or two subsequent fiscal years. Based on that qualified certification as well as the concerns raised in this report and according to state law, the county superintendent must take all actions necessary to ensure that the district meets its financial obligations. Moreover, we have concerns about Montebello's ability to fix on its own the many issues we identified. For these reasons, we believe the county superintendent should take additional steps to help Montebello regain its positive certification, justify its expenses, and improve its financial standing.

Figure 14
Absent Significant Changes, Montebello Is at Risk of State Intervention

Recommendations

Los Angeles County Superintendent

To ensure that Montebello takes the steps necessary to prevent state intervention and regain its positive financial certification, the county superintendent should do the following:

• Direct Montebello to submit a corrective action plan to address the issues identified in this report including balancing its budget, amending and adhering to its hiring procedures, and establishing adequate safeguards to ensure that policies related to bond proceeds, conflicts of interest, and the approval of expenditures are implemented and followed.
• Assist Montebello in developing a plan to justify its workforce size and cost in terms of its current and projected enrollment, including evaluating the necessity of current staff levels and personnel costs.
• Evaluate the necessity of executive positions and adjust executives' salaries based on an analysis of the number and cost of executives in comparable districts.
• Ensure that Montebello implements all of the recommendations detailed below.

Montebello

To improve its current financial condition and ensure future viability, Montebello should do the following:

• Within 60 days, revise its fiscal stabilization plan and make the necessary cuts to fund its ongoing commitments.
• Create a robust budgeting process within 90 days using best practices of the Government Finance Officers Association to ensure Montebello's ability to meet its priorities while maintaining the required level of reserves that buffers the district from drastic cuts in times of economic instability.
• Within 90 days, implement an effective budget monitoring process with regular budget-to-actual comparisons. This process should include safeguards against spending in excess of budgeted expenditures and require advance board approval of such spending before it occurs. For example, Montebello should require that the budget manager perform monthly reviews of budget-to-actual figures and provide detailed explanations to the board for any variances.

To ensure that Montebello hires the most qualified executive and management staff, Montebello should immediately adhere to its policies for hiring classified employees, including screening candidates to ensure that they meet the minimum qualifications. Montebello should also hold provisional employees to the same standards for minimum qualifications as its policy requires.

To ensure that Montebello hires qualified classified employees, the personnel commission should, within 90 days, revise its policies to require the classified director to provide it with the education and work experience of any candidates on eligibility lists for high‑ranking positions. It should also require the director of the personnel commission—the classified director—to provide it with a list of all provisional appointments, including information on how those employees meet the minimum qualifications.

To ensure that it does not violate state law, Montebello should immediately adhere to its policies and ensure that provisional employees do not work more than the legal maximum number of days of service.

To ensure that Montebello hires executives who meet the minimum qualifications, it should verify that such individuals hold both an administrative and teaching credential before appointing them to a position of superintendent or assistant superintendent.

In order to rebuild trust with its community, Montebello should adhere to its policies for hiring certificated personnel and fill any vacant positions for executives through a competitive hiring process, including advertising the positions, screening to ensure that minimum qualifications are met, and interviewing 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 establish a policy within 30 days that requires a justification for why the district is creating a position. Additionally, in order to maintain transparency when creating new positions, Montebello should immediately begin to document its justifications.

To ensure that Montebello hires qualified certificated and classified employees, within 90 days the board should revise its policies to require the superintendent or his or her designee to provide information to the board about recruitments for high-ranking employees. The board should consider, at a minimum, the following information when approving appointments:

• The number of initial applicants.
• The number of candidates who passed the screening and interviewing steps.
• The education and work experience of the final candidate recommended by the superintendent or designee.

To ensure that Montebello is making hiring decisions free of bias or favoritism, within 90 days it should strengthen its hiring policies related to nepotism and conflicts of interest for classified and certificated personnel to include the following: establishing restrictions on immediate family members being involved in the screening and interviewing processes and definitions of what types of personal relationships fall under the nepotism policy, which work relationships the nepotism policy applies to, and what factors to consider when evaluating the potential impact of a personal relationship.

To ensure that bond funds are spent appropriately, the district should immediately do the following:

• Ensure that its bond committee meets at least once per year.
• Ensure that the bond committee member positions are filled.
• Require that its contracted project manager provides detailed bond expenditure reports for all relevant bonds to the bond committee at least biannually.
• Ensure that its contracted auditor delivers a timely bond audit and that Montebello addresses the auditor's concerns and recommendations.

To ensure that staff who make or influence district decisions are free from perceived or actual conflicts of interest, Montebello should do the following:

• Immediately identify all positions whose incumbents make or influence district decisions and designate those not already identified in its conflict‑of‑interest policy.
• Immediately require designated employees to file statements of economic interests and adhere to its conflict-of-interest policy.
• Within 60 days, expand its policy to require all employees approving contracts or expenditures to be designated and file a statement of economic interests.

To ensure that Montebello spends its funds for allowable and reasonable purposes, it should do the following:

• Require employees whose salaries are funded by voter-approved bond proceeds to fill out detailed timesheets to demonstrate that they work on bond-related activities. Bond proceeds should only be used to pay the portion of the salary relating to bond-funded activities that is supported by the timesheet.
• Implement an inventory tracking system that allows it to know where its equipment is located. Montebello should also periodically review its inventory listing to ensure that equipment is being properly used.
• Close the adult education fund's revolving fund account.
• Require all employees to obtain approval for overtime before performing any overtime work and to submit an explanation of tasks they completed during their overtime work when they submit their overtime timesheet for payment.
• Follow the procedures in its purchase card manual including requiring employees to submit receipts for all purchases made with the card. If in violation of the manual, suspend or cancel the employee's card privileges and require employees to reimburse the district for improper purchases.

To ensure that state adult education expenditures are reasonable and justified, the board should do the following within one year:

• Develop a policy that requires adult education classes to meet specific minimum thresholds for class size. If classes do not meet these thresholds, the adult program must cancel the class.
• Require the adult program to annually report to the consortium and to the board on the accurate number of students in each class, number of hours taught, and cost of the class per student.

To improve the cash collection process, Montebello should ensure that the adult program has adequate safeguards in place to minimize the risk of misuse of funds. It should specifically do the following:

• Within 60 days, implement policies and procedures that align with best practices for cash collection and cash deposits that include robust safeguards such as ensuring separation of duties in the cash collection process.

Consortium

To ensure that state adult education funds are used in the most efficient and effective manner, the consortium should do the following within one year:

• Complete an assessment of Montebello's ability to meet the requirements of its adult education plan to determine whether its use of state funds has been effective. If Montebello is found to be consistently ineffective, the consortium should immediately recalculate the adult program's fund allocation for the future.
• Develop policies and procedures to ensure the proper collection and reporting of enrollment, attendance, and expenditure data by consortium members. Periodically review enrollment, attendance, and expenditure data to ensure their accuracy.

We conducted this audit under the authority vested in the California State Auditor by Section 8543 et seq. of the California Government Code and according to generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives specified in the Scope and Methodology section of the report. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Respectfully submitted,

ELAINE M. HOWLE, CPA
State Auditor

Date:
November 2, 2017

Staff:
Nicholas Kolitsos, CPA, Audit Principal
Michelle J. Sanders
Lisa Ayrapetyan, CPA, CIA, CFE
Kathryn Cardenas, MPPA
Eliana Estrada
Yuhan Lu
Tracy McPeak
Ryan J. Mooney, CFE
Maria Peduru
Hunter Wang, CFE
Kevin Wedman

Legal Counsel:
Heather Kendrick, Sr. Staff Counsel

For questions regarding the contents of this report, please contact
Margarita Fernández, Chief of Public Affairs, at 916.445.0255.

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