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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

Introduction

Background

The Montebello Unified School District (Montebello) serves approximately 28,000 students in Los Angeles County. Montebello operates 17 elementary schools, six intermediate schools, four high schools, one alternative education school, and four adult schools. The district is controlled by the Montebello Unified School District Board of Education (board), which is the governing and policy‑making body for Montebello. Its five members are elected by district voters and they serve four‑year terms. The board's primary role is to establish Montebello's long-term vision, maintain a basic organizational structure, and ensure educational and fiscal accountability to the community while providing community leadership. The board is also solely responsible for employing the superintendent, who is the general administrator of all of Montebello's instructional and business operations. Since January 2017, one employee has been serving as both the interim superintendent and the assistant superintendent of instructional services.

The Los Angeles County superintendent (county superintendent) is responsible for maintaining the fiscal oversight of each school district in Los Angeles County, which she does through the Los Angeles County Office of Education (LACOE). According to LACOE, it is the nation's largest regional education agency, supporting public school districts through a number of means, including fiscal oversight. As part of that fiscal oversight, LACOE reviews districts' annual budgets and interim reports to assess their ability to meet their financial obligations. When a school district may be unable to meet its financial obligations for the current or two subsequent fiscal years, the county superintendent can take actions such as assigning a fiscal expert to advise the district or requiring the district to submit a proposal addressing its fiscal condition. If the county superintendent, in consultation with the state superintendent of public instruction, determines that a school district will be unable to meet its financial obligations for the current or subsequent fiscal year, the county superintendent can develop and impose a budget revision or reject any district action determined to be inconsistent with the district's ability to meet its obligations.

Commencing with the 2013–14 fiscal year, the local control funding formula (LCFF) became Montebello's main funding source. Although LCFF established for school districts new funding levels called a target entitlement, the Department of Finance estimated it would take eight years to reach those target levels. However, in 2016–17 the California Department of Education reported that all school districts had received at least 90 percent of their target funding. LCFF bases funding primarily on average daily attendance, and in fiscal year 2015–16, LCFF provided 76 percent of the funding for Montebello's general fund while federal sources, other state sources, and local sources provided the remaining 24 percent. Since the district began transitioning to LCFF in fiscal year 2013–14, Montebello's general fund revenues have increased. As shown in Figure 1, Montebello did not receive its full LCFF funding in past years. However, because of Montebello's declining student population, its LCFF target entitlement has been steadily shrinking. In other words, the funding Montebello was receiving as part of this transition is going to start declining. As we discuss in the Audit Results, Montebello has not taken appropriate steps to mitigate this expected decline in funding.

Figure 1
While Montebello Has Moved Closer to Its Full LCFF Funding, That Funding Is Decreasing

Source: California Department of Education funding snapshot for Montebello.

Montebello also receives funds for the construction, reconstruction, rehabilitation, or replacement of school facilities through bond measures. The bonds issued for these purposes required approval from at least 55 percent of district voters. The state constitution restricts these bond funds from being used for any other purpose, including paying for teacher and administrator salaries and other school operating expenses. It also requires that Montebello establish a list of the specific school facilities projects the bond measures will fund. Finally, the constitution requires other safeguards such as an annual financial and performance audit of bond funds and expenditures. In addition, state law requires the establishment of an independent citizens' oversight committee (bond committee). Montebello primarily had 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 of September 2009, Montebello had issued all $98 million related to Measure M. Although Montebello does not separately track the bond activities in its financial software, its financial statements for fiscal year 2015–16 list a remaining balance of $17.7 million in the building fund, which contains proceeds from Measure M and any other prior bond issuances. In addition, Montebello issued $100 million of Measure GS bonds in December 2016, which is now available to spend.

Montebello's main categories of general fund spending include salaries, benefits, services and operating expenditures, and books and supplies. Specifically, as shown in Figure 2, in fiscal year 2014–15 it spent most of its funds on salaries and employee benefits, amounting to $249.1 million, or 84 percent.

Figure 2
In Fiscal Year 2014–15, 84 Percent of Montebello's General Fund Expenditures Were for Employee Salaries and Benefits
(in Millions)

The Board Is Involved in Hiring Montebello's Employees

Montebello employs certificated and classified personnel. Certificated personnel must hold a valid teaching or school services‑related credential that licenses them to do the work required by their positions and may include teachers and certain administrative positions. Classified personnel are not required to hold credentials for their positions, which include directors, attendance officers, technicians, and custodians. Different policies govern the two personnel types and establish the parties responsible for screening and hiring them.

The board has adopted policies that govern the recruitment of certificated staff. As shown in Figure 3, the superintendent or his or her designee disseminates job announcements when Montebello creates a new position or is filling a vacancy. Montebello staff then check applications to ensure that candidates meet the minimum qualifications, conduct interviews, and verify the references and credentials of the candidates. The superintendent then presents to the board one candidate who has met all the qualifications for the position. The board approves only those candidates recommended by the superintendent or the designee.

Figure 3
The Board and Superintendent Ultimately Make the Decision to Hire Certificated Employees

Classified personnel go through a similar process. However, unlike the certificated process, the classified hiring process includes Montebello's Personnel Commission (commission), which is charged with prescribing and interpreting the rules that pertain to selecting and retaining classified employees according to the merit system. State law established the merit system to ensure that the recruitment of classified personnel is based on merit and fitness. The commission's three members must be registered voters, reside in Montebello, and have given evidence that they support the concept of employment and promotion on the basis of merit and fitness. Members of the commission serve three-year staggered terms, ensuring that only one commission member's term expires each year.

Figure 4 shows Montebello's hiring process for recruiting classified personnel. If Montebello is creating a new classified position, the commission must determine the classification, including minimum qualifications and salary ranges based on the position duties established by the board. The commission then announces exams for the classified positions on an employment opportunities bulletin when no eligibility list exists, and a human resources specialist checks applicants' minimum qualifications. Montebello staff may conduct performance exams and interviews. Once interviews are completed, candidates are placed on an eligibility list in final rank order, which the personnel commission approves. Generally, the board and its designated managers interview candidates on the eligibility list and the appointing authority selects the final candidate from the eligible candidates. The director of the personnel commission then certifies that the final selection is in accordance with classified rules and regulations. Finally, the superintendent or designee presents one candidate to the board which it can then approve.

Figure 4
The Board, the Personnel Commission, and the Director of Classified Human Resources All Play a Role in Hiring Classified Personnel

According to its policy, the board can employ certificated administrators, supervisors, and classified senior management on a contract basis in order to attract qualified staff. The board contracted with some of Montebello's certificated and classified executives for employment from fiscal years 2013–14 through 2015–16. However, the board's hiring policies do not exempt these contracted executives from meeting the hiring process requirements; Montebello must advertise these positions, ensure that candidates meet the minimum qualifications, and perform interviews. Then the board approves the contracts.

Montebello Claims to Have One of the Three Largest Adult Education Programs in California

The Montebello adult education program (adult program) was established in 1936 and includes four adult school sites that offer a variety of classes to students 18 years or older. The adult program advertises that it is one of the three largest adult schools in California with a total enrollment count of about 22,500 during the 2015–16 school year. Examples of the adult program's courses include English as a second language, citizenship classes, adult basic education classes, and career technical classes. Some of the classes are free, and all classes are free if a student is working toward a diploma, over age 60, or receiving public assistance. In some instances, students must pay tuition and fees to help defray the cost of the class. The adult program charges students tuition and fees that range from $11 for computer classes to $750 for pharmaceutical technician classes. Until recently, it only accepted cash payments.

The adult program receives funding from the federal, state, and local sources. In fiscal year 2015–16, federal funding made up 10 percent of the adult program's revenue while state funding made up 89 percent. One percent of the revenue came from local sources, including a small portion from student tuition and fees.

In 2013 the Legislature authorized the creation of regional consortiums of community college and school districts to develop regional plans to better serve the educational needs of adults. Specifically, Montebello's adult education program is now part of the Los Angeles Regional Adult Education Consortium (consortium), whose vision is to sustain, expand, and improve adult education in the Los Angeles region. In 2015 the Legislature established the Adult Education Block Grant Program, which included two types of state adult education funding: maintenance-of-effort funding and need-based funding. The State allocated maintenance‑of‑effort funding to school districts in amounts equal to those they received in fiscal year 2012–13.

The other source was need-based funding, which the State allocated to each consortium. Members of each consortium then decide how to allocate the funds to participating community college and school districts. In fiscal year 2015–16, Montebello's adult program received $12.4 million in maintenance-of-effort funding and $3.1 million in need-based funding. Figure 5 shows the oversight and funding structure for the consortium in fiscal year 2015–16.

Figure 5
The Montebello Adult Education Program Is Overseen and Funded by the Los Angeles Regional Adult Education Consortium (Fiscal Year 2015–16)

Starting in 2016–17, however, the State eliminated the distinction between maintenance-of-effort funding and need-based funding, combining them into one funding source called consortia funding. Generally, state law requires a consortium to keep its members' funding relatively stable. However, if the consortium finds that a member has been consistently ineffective at providing services and that reasonable interventions have not resulted in improvements, it can reduce that member's allocation.

Concerns with Montebello and the Board Have Diminished Public Trust

Over the last year, Montebello has been the subject of scrutiny in the face of its deteriorating financial situation. As part of its March 2017 fiscal stabilization plan, Montebello committed to making $33.4 million in reductions, mainly through staffing cuts. Around the same time, the board approved more than 300 layoffs. Since then, Montebello students, parents, and district staff have protested the potential layoffs and made claims of corruption on the part of board members. Although the board ultimately allowed the rescinding of at least 200 layoff notices, the Montebello community continues to publicly voice its distrust in the board.

Scope and Methodology

The Joint Legislative Audit Committee (Audit Committee) directed the California State Auditor to conduct an audit of Montebello's financial practices and performance. Table 1 lists the Audit Committee's objectives and the methods we used to address them.

Twice during our audit, Montebello took actions to destroy documents that may have been relevant to our audit objectives. At the beginning of the audit in April 2017, we sent the interim superintendent our standard letter instructing him to notify staff that in anticipation of the audit, they should not purge files or records, make alterations to existing entries in the files or records, or backdate any additions to the files or records. In May 2017, we were notified that Montebello staff had placed documents in a bin to be shredded. However, we were able to intercept the documents before they were shredded. At our request, the interim superintendent emailed the instructions and told the recipients to inform their staff about the protocols. Nevertheless, we were subsequently notified of another shredding incident on a weekend in August 2017. We verified that, in fact, documents were shredded. Although the shredded documents may have been relevant to the audit objectives, we believe we obtained the evidence necessary to support the findings, conclusions, and recommendations we make in this report.

Table 1
Audit Objectives and the Methods Used to Address Them

Audit Objective		Method
1	Review and evaluate the laws, rules, and regulations significant to the audit objectives.	We reviewed relevant laws, rules, regulations, guidelines, and policies related to the financial and operational administration of school districts.  We interviewed key staff at Montebello who oversee the administration of the school district, including staff in finance, human resources, and the facilities department.
2	For a selection of service contracts, determine whether the policies and practices for soliciting, awarding, and monitoring the contracts comply with laws and regulations related to conflicts of interest and the competitive bidding process for both formal and informal bids. Additionally, evaluate whether Montebello's contracting process meets required levels of transparency throughout the process.	The former superintendent and chief financial and operations officer recently filed a complaint alleging, among other things, that the board and former chief business officer violated various state laws when awarding certain contracts, such as competitive bidding laws and laws governing the disposal of school property. 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.
3	Review and evaluate Montebello's hiring process. At a minimum, determine the extent to which the following conditions exist: The hiring policies and practices for executive positions include the appropriate level of screening and evaluation to ensure that individuals hired meet the minimum job requirements and qualifications for the positions. The current executives meet the minimum job requirements and qualifications for the positions they hold.  The hiring policies and practices include protections against nepotism and conflicts of interest.	To evaluate whether Montebello's hiring process for executives includes an appropriate level of screening and evaluation, we reviewed relevant criteria from Objective 1 related to the hiring of classified and certificated personnel. For our review, we selected 10 executives and managers Montebello hired from fiscal years 2013–14 through 2015–16. For each of the executives and managers, we reviewed their personnel files and recruitment files in Montebello's certificated and classified human resources departments to assess whether the executives and managers met the minimum job requirements and qualifications for their positions. We also determined whether Montebello followed its established process when it hired or appointed the 10 individuals we evaluated. We summarize the results of our review in Tables 3 and 4 of our audit report. To evaluate Montebello's hiring policies and practices that protect against nepotism and conflicts of interest, we reviewed Montebello's policies, policies from other public agencies, and guidance from the California Department of Human Resources. We used the policies from other public agencies and state guidance to identify weaknesses in Montebello's policies. To obtain perspective related to this objective, we spoke with the board president. We also spoke with the longest‑standing board member to obtain historical context.
4	Compare the compensation for executive and administrative positions at Montebello to compensation at other school districts.	We selected four comparable school districts based on the number and type of schools, number of employees, enrollment data, expenditures and revenues, as well as census data of the cities in which they are located. We obtained data related to the size of Montebello and the comparable school districts from their individual school websites as well as the Department of Education. Since these data are public information, and the verification process requires the auditors to go to each site, we determined that it was cost-prohibitive to perform data reliability testing. We obtained salary information for Montebello executives and the salary ranges for comparable school district positions and compared them. We found that salaries for a selection of administrative positions at Montebello were comparable to the salaries for similar positions at the other districts. We compare executive positions in Figure 10, which includes assistant superintendents or their equivalent and above. We created an organization chart for Montebello and identified the departments that its executives oversee. We assessed the job descriptions of Montebello's executives to determine whether their responsibilities overlap.
5	Identify Montebello's major categories of spending.	We reviewed Montebello's financial statements to identify its major categories of spending.
6	For a selection of expenditures, determine whether designated funds, such as maintenance and building funds, as well as nondesignated funds, are spent for allowable and reasonable purposes.	To determine whether expenditures were allowable and reasonable, we performed the following: Reviewed 22 expenditures related to various designated and nondesignated funds from fiscal years 2013–14 through 2015–16. We selected the expenditures from Montebello's financial system. To ensure the data was complete, we traced expenditure totals to its audited financial statements and found the amounts materially agreed. Reviewed six expenditures related to purchase cards in fiscal years 2015–16 and 2016–17. Reviewed 42 expenditures related to the adult education revolving fund account from fiscal years 2013–14 through 2015–16. Reviewed overtime payments from fiscal years 2013–14 through 2015–16. Reviewed five bond-funded salary payments in fiscal year 2017–18.
7	Determine how Montebello has responded to declining enrollment, especially as it relates to programs, hiring, staffing, expenditures, and any other areas that may have been impacted.	We interviewed key Montebello staff about the district's efforts to counter declining enrollment. We reviewed and analyzed Montebello's budgets to determine the extent to which the district responded to LACOE's concerns, including deficit spending. We reviewed Montebello's most recent bargaining agreement and layoff resolutions to determine if the district implemented its planned cost reduction measures. We reviewed Montebello's audited financial statements and budgets to assess reserves. We also analyzed general fund revenues and expenditures compared to average daily attendance. To obtain perspective related to this audit objective, we spoke with the board president.
8	Assess the adequacy and effectiveness of Montebello's practices for obtaining and monitoring bond proceeds including the following: The oversight structure of bond proceeds.  The monitoring of the use of bond proceeds to ensure that expenditures are allowable and reasonable. The safeguards in place to avoid abuse and conflicts of interest.	We identified Montebello's active bonds and determined the current funding available. We interviewed Montebello staff regarding bond oversight and the activities of the bond committee. We identified the relevant oversight safeguards over the bond funds and determined whether the district complied. We evaluated Montebello's conflict-of-interest policies for the bond committee and found no issues. We obtained and evaluated the disclosure statements Montebello requires its employees to file including individuals who may approve bond‑related expenditures and contracts.
9	Review and assess any other issues that are significant to the audit.	We evaluated the adult program by doing the following: Interviewed consortium staff and assessed how the consortium distributes funds to the adult program. Analyzed the adult program's enrollment and attendance reports. Verified the adult program's enrollment and attendance records by surveying a selection of students. Assessed the adult program's cash collection process at two program locations and reconciled cash collected to receipts.

Sources: California State Auditor's analysis of state law and information and documentation identified in the column titled Method.

Assessment of Data Reliability

In performing this audit, we obtained electronic data files extracted from the data source listed in Table 2. The U.S. Government Accountability Office, whose standards we are statutorily required to follow, requires us to assess the sufficiency and appropriateness of computer‑processed information that we use to support findings, conclusions, or recommendations. Table 2 describes the analyses we conducted using data from the listed source, our methods for testing, and the results of our assessment.

Table 2
Methods Used to Assess Data Reliability

Data Source	Purpose	Method and Result	Conclusion
Overtime payments from Montebello's payroll system, including time‑and‑a‑half and double‑time.	For overtime payments from fiscal years 2013–14 through 2015–16, calculate the increases in overtime during the time period. We present our analysis in Figure 12.	We performed data-set verification procedures and electronic testing of key data elements and found no errors. We performed accuracy testing on a random selection of 29 overtime entries by tracing key data elements to supporting documentation and found no errors. We verified completeness by tracing a haphazard selection of 29 hardcopy timecards to the data and found no errors.	Sufficiently reliable for this audit purpose.

Source: California State Auditor's analysis of various documents, interviews, and data from Montebello.

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