INTRODUCTION

This report results from a management audit of the Centinela Valley Union High School District, located in Lawndale, California. The District includes two high schools and one adult education school. The audit was begun to establish if the District had financial and/or management problems.

Upon reviewing the information disclosed during the audit, it seemed apparent that major problems do exist and that this condition has persisted for at least the last six years.

During this time the District has employed six superintendents, none of whom ever completed their contract, but instead accepted substantial monetary payments to terminate their employment without instituting legal action. These payments, and the collateral legal expenses which accompany the settlement negotiations, exerted an additional significant financial burden on the District.

This rapid turnover at the top resulted in administrative turmoil, with other senior positions often being vacant for long periods, affecting the education of students and the effective operation of the District.

The Grand Jury Committee on Education and Government Operations desired to interview all school board members as part of the general fact finding review. Unfortunately certain key individuals who may have provided needed historical information to the investigative process, were not available for interviews.

Recommendations

It is recommended that:

1. The governing board re-dedicate their efforts to improve the education and general welfare of all students under their tutelage.

2. The governing board restrict their activities to setting educational policies and guidelines only.

3. The District's superintendent be responsible for day-to-day operations, within the guidelines of board policy.

4. The Board review the employment status and contact terms of all staff members, specifically to assure that none is receiving unwarranted monetary benefit.

5. The Board develop detailed financial projections designed to assure long term financial viability of the District.

6. A Policies and Procedures Manual be developed and implemented for purchasing and all other major expenditures, following guidelines established by the County Office of Education.

Special Finding

The Los Angeles County Office of Education has limited authority under current statutes to intervene in the operations of local school boards, such as Centinela Valley High School District, even when board actions indicate instability, high personnel turnover and general mismanagement, all resulting in diminished educational opportunities for the students in the school.

Special Recommendation

It is recommended that:

The Los Angeles County Office of Education develop policies and make a recommendation for State legislation which would permit the County Office to intervene in obvious cases of School Board mismanagement of the type exemplified by the past and continuing situation at the Centinela Valley Union High School District.

MANAGEMENT STABILITY AND ROLE OF THE BOARD OF EDUCATION

The District has not had a stable management team since 1996. Key management and business positions have suffered high turnover and have been vacant or filled by consultants and temporary employees for a significant portion of the last four years. This lack of stability has been a major factor in the District's recurring financial problems and many of its poor business practices. As of November 1998, the positions of Superintendent, Assistant Superintendent for Business Services, and Administrator for Fiscal Services are finally all filled by permanent employees.

Management and business staff of the Centinela Valley Union High School District has suffered high turnover and a lack of permanent full-time employees in key management and business positions since FY 1995-96. This may be changing now because within the last seven months the District hired a new permanent superintendent, a new permanent Assistant Superintendent for Business Services and a new permanent Administrator, Fiscal Services. If all of these employees perform capably and choose to remain with the District for a normal tenure, stability and improved business management has a better chance of returning to the District.

Chart 1 shows a history of five of the key management and business positions in the District for the last five and the current fiscal year. The positions shown are: Superintendent; Assistant Superintendent for Business; Administrator, Fiscal Services; Director of Purchasing; and, Director of Maintenance & Operations. As shown, each of the positions has had substantial turnover and/or been frequently filled by consultants when vacant. Each of the consultants had different agreements with the District in terms of number of hours worked and duties performed, resulting in variations in approaches and functions in nearly all of these key positions.

CHART 1

MANAGEMENT POSITION TURNOVER,

FY 1993-94 THROUGH 1998-99

Title	1993/94	1994/95	1995/96	1996/97	1997/98	1998/99
Superintendent	Incumbent #1	Incumbent #1	Incumbent #1	(vacant) Incumbent #1	Incumbent #2 Incumbent #3* Incumbent #4*	(vacant) Incumbent #5 (8/98 - now)
Assistant Superintendent, Business	Incumbent #1	Incumbent #1 Contract Firms**	Incumbent #1 (vacant) Contract Firms** Incumbent #2	Incumbent #2* (vacant) Incumbent #3	Incumbent #3* Incumbent #4* Incumbent #5*	Incumbent #6** Incumbent #7 (11/98-now)
Administrator, Fiscal Services	Incumbent #1***	Incumbent #1***	Incumbent #1***	Incumbent #1*** Incumbent #2 Incumbent #3	Incumbent #1***	Incumbent #1*** Incumbent #4(11/98-now)
Director of Purchasing	Incumbent #1	Incumbent #1	Incumbent #1 Incumbent #2**	Incumbent #2** (vacant) Incumbent #3	Incumbent #3 Incumbent #4**	Incumbent #4** Incumbent #5
Director, Maintenance & Operations	Incumbent #1	Incumbent #1	Incumbent #1 (vacant) Incumbent #2**	Incumbent #2** Incumbent #3** Incumbent #4**	Incumbent #4** Incumbent #5	Incumbent #5

*interim

**consultant

***on paid leave periodically throughout theperiod covered

The role of top managers of an organization includes setting performance goals, developing plans to achieve the goals, and monitoring performance to ensure that the goals are being achieved. Little of this has been possible at Centinela Valley Union High School District over the last four years as the management team kept changing and key positions were vacant or filled by temporary consultants. As a result, performance in many key administrative areas has been poor.

Besides the impact of management turnover and vacancies on finances and business operations, it has affected District costs. The consultant acting as Assistant Superintendent for Business Services in 1998 was paid $70,902 for a five month period of less than full-time service. Annualized, this amounts to approximately $170,165, substantially more than the annual salary for the position. In addition, there have been numerous settlement payments and lawsuits filed by terminated management employees, all of which affects the District financially and consumes staff time that could be better spent.

Role of Board of Education

As the governing body, the Board of Education is responsible for the District's financial condition and overall management. The Board bears ultimate responsibility for attracting and retaining qualified staff who will properly manage the District finances and business practices. The Board does not appear to have always understood its role and does not have a system in place to effectively fulfill these responsibilities, as demonstrated by the District's repeated financial problems over the last four years.

While vacancies in key management positions can partially explain the District's financial problems, responsibility in this area ultimately lies with the Board of Education. The governing board is responsible for the overall well being of the District. Although Board members should not be expected to keep up with the day to day operations of the District, the Board should establish high level policies and annual goals for management and monitor actual performance to ensure the District's financial and operational well being. For the Board to perform its role effectively, it is critical that the Board and District attract and retain a qualified management team. The absence of Board policy- and goal-setting, formalized performance measurement, as well as the lack of management staff stability over the last four years have been key factors in the District's recurring financial and business weaknesses.

An example of the need for Board direction and stable management staff can be found in reviewing the District's financial situation over the past four years. Budgeting and financial management at the District falls under the purview of the Assistant Superintendent for Business, who reports directly to the Superintendent. As shown on Chart 1, the Assistant Superintendent for Business has had eight incumbents during the three and one half-year period since FY 1995-96. Of the eight incumbents, one was assigned on an interim basis, two were consultants who worked less than full time, and two performed the position's functionsat the same time as they were also serving as interim superintendent. Excluding these exceptions, the District has not had a full-time permanent Assistant Superintendent for Business since FY 1995-96. During the same time, the District had numerous financial problems as summarized in the following chronology.

As background to this chronology, it should be noted that State law requires the Los Angeles County Office of Education (LACOE) to review and rate the adopted budgets of the school districts of Los Angeles County as well as two interim reports prepared each school year. In accordance with State law, the District self-certifies its budget and financial reports and LACOE reviews them and selects one of three ratings: 1) approval; 2) qualified approval; or, 3) disapproval. Each classification is based on State-established criteria and guidelines. In accordance with State law a qualified rating or disapproval of a budget or interim report can trigger certain actions such as State reviews and audits of a district. In extreme cases, the State can withhold funding or assume control of a district through assignment of a trustee. CVUHSD's history with LACOE and the State between FY 1995-96 and the present has included the following:

FY 1995-96

• The District filed its First Interim budget report for the year with a "qualified" self-certification (districts are required to provide a self certification prior to LACOE's ratings). LACOE concurred, raising concerns about the absence of multi-year projections, accounting records being in disarray, and serious questions about the credibility of the attendance taking system.

• The District notified LACOE that it was unable to submit its statutorily required Second Interim Budget Report for FY 1995-96.

• LACOE requested assistance from the State Fiscal Crisis and Management Assistance Team (FCMAT) to review the District's finances partly due to the absence of the State-mandated Second Interim budget report from the District.

• FCMAT declared the District to be in a fiscal emergency. Independent assessments by the FCMAT team were planned for a number of areas including accounting practices, multi-year projections, and the Board's role in ensuring District solvency.

FY 1996-97

• LACOE disapproved the District's originally adopted budget due to lack of compliance with State budgetary requirements.

• LACOE disapproved the District's revised budget noting that it did not contain necessary multi-year projections, the District's accounting practices were in disarray,and that the Board was not assuming its full responsibility for ensuring the solvency of the District. A District budget was finally approved by LACOE in November 1997, over four months into the fiscal year.

• The California Department of Education notified the District of formation of a budget review committee as a result of the disapproval of its budget by LACOE

• The District's independent financial auditors did not submit an opinion along with its FY 1995-96 audit regarding the validity of the District's General Fund revenues because of weaknesses in the attendance system at the District.

• The California Department of Education notified the District of its concerns about the FY 1995-96 audit report and stated it was unable to certify future apportionments until the issues raised by the audit were resolved by the District.

• A fiscal advisor was temporarily assigned to the District by LACOE.

• ACOE notified the District that it was not a "going concern", as defined by the State Education Code, with particular regard to the District's inability to meets its financial obligations in the current and subsequent two fiscal years.

• The California Department of Education notified the District of its plan to conduct an audit of its attendance record keeping system due to ongoing concern about its validity.

• LACOE gave the District a "qualified" rating based on its Second Interim Report citing concerns about weaknesses in the attendance system and related financial matters.

FY 1997-98

• LACOE disapproved the District's adopted budget because the results of the State's audit of the District's attendance system were unknown and due to concerns about the validity of District revenue projections. Other revisions were also requested regarding many of the District's revenue assumptions. After revisions by the District, the budget was approved in October 1997.

• The State attendance audit resulted in a $1 million penalty for the District due to irregularities found in the District's attendance record keeping systems.

• The District's First and Second Interim Reports were approved by LACOE though the $1 million penalty was noted as causing the District to end the year in a deficit position.

FY 1998-99

• LACOE disapproved the District's adopted budget due to the District's lack of resolution about the its attendance system problems, inaccurate estimates of certain revenues, understated expenditures, lack of compliance with the State requirement for District reserves equal to 3 percent of the General Fund and some technical matters. After revisions, the budget was approved by LACOE in October 1998 and received a positive certification.

• LACOE notified the District that its review of the District's First Interim Budget Report and additional information resulted in a downgrade from a positive to a qualified budget certification because the budget included overstated estimated State revenue for reimbursement of District Notification of Truancy costs amounting to between $750,000 and $1 million.

During the period summarized above, themes of an unreliable attendance system (which is the basis of State revenues), absence of multi-year projections, inaccurate revenue assumptions, lack of a standardized budget process, and a business and accounting office without adequate procedures were identified repeatedly by LACOE and the State. The Board of Education should have been monitoring the situation and directing management to make the necessary changes to end these recurring financial management problems. While Board members cannot be expected to all have backgrounds in finance and budgeting, the Board should establish high level finance and budget polices and annual goals to be implemented and achieved by the Superintendent. The Superintendent in turn needs top managers in place to carry out these directives. Such a communications flow did not occur during the last four years due to lack of systematic Board oversight in this area and the absence of permanent full-time management staff.

Examples of long term policies, short term goals, and performance measures in each area are provided in Chart 2. These are the type of policies and goals that should have been established by the Board of Education to address the District's recurring financial and budget problems as identified by its financial auditors, LACOE, and the State Department of Education. The performance measures for each area show the type of quantifiable outcomes the Board should review to determine that their direction is being followed.

By establishing high level policies such as those listed below, developing specific annual or short term goals for the Superintendent, and creating a formalized system of performance measurement, the Board could make significant strides in ensuring the financial well being and solvency of the District. Making performance information available to the public on an annual basis would also provide a forum for showing the progress and accomplishments of the Board of Education.

Chart 2: Examples of Policies, Goals and Performance Measures that Should be Established by the Board of Education

Long Term Policy	Short Term Goal	Performance Measures
Well documented multi-year projections shall be prepared annually for the subsequent three years.	Staff shall develop and document a methodology for preparing projections, to be presented to Board.	Approval and a positive certification of budget by LACOE.
The District's attendance system accurately captures ADA and is accepted by LACOE, District financial auditors, and State.	Make changes to system necessary to ensure its accuracy. Provide staff training as needed.	Approval by auditors, LACOE and the State.
Salary and benefits shall be negotiated prior to approval of the budget for the subsequent year.	Meet and confer with labor organizations to adjust negotiation schedule.	Annual salary and benefits increases determined prior to and included in budget for approval.
District will meet or exceed State required reserve of 3% of General Fund.	Adjust expenditures as necessary to meet reserve requirement.	Budgeted and actual reserve levels at beginning and end of each fiscal year.
Attract and retain a qualified high performing management team.	Identify key performance expectations for management team and evaluate annually. Identify steps necessary for retaining management team.	Turnover in management positions.

A Board plan for improvements in the areas of financial deficiency repeatedly identified by LACOE over the last four years would have certainly addressed the need for hiring and retaining management staff with the necessary business skills and qualifications. Holding the Superintendent accountable for improvements in the District's financial condition would have made recruitment and retention of a permanent full-time Assistant Superintendent for Business a high priority for the Superintendent and Board. Difficulty in recruiting would have been reported back to the Board along with alternative solutions to solving this problem, all toward the end of meeting the Board goal of improved management of the District's finances. By directing the Superintendent to achieve improvements in the area of District finances, and holding him accountable for this area, the Board would have exercised their role as policy makers.

The Superintendent reports that he has proposed a statewide training program for the Board of Education on working effectively as a governing board. Two Board members are reportedly now enrolled in such a program. Such training is consistent with the findings above and should be encouraged for all Board members.

Recommendations

It is recommended that the Board of Education:

1. Formalize its policy making role by establishing high level District policies in key academic and business areas such as finance, budgeting and purchasing and others to ensure the District's academic performance, fiscal solvency, and sound business practices;

2. Establish annual or short term goals for the Superintendent and related outcome or performance measures to ensure implementation of the Board business and academic policies and a formalized mechanism for measuring achievement of these goals without Board micromanagement;

3. Include attracting and retaining qualified management staff as a Board policy, measured by annual turnover and satisfactory or better performance of the incumbents;

4. Encourage all Board members to attend training in effective school district governance.

It is recommended that the Los Angeles County Board of Supervisors:

5. Direct the Auditor-Controller of Los Angeles County to systematically follow up on implementation of all recommendations in this audit and report the results back to the Board of Supervisors on a regular basis.

DISTRICT FINANCIAL STATUS

The Centinela Valley Union High School District General Fund reserve is significantly below the State of California recommended minimum reserve level, raising doubts about the District's ability to meet all of its expenses. The Special Revenue Fund has substantial undesignated reserves that could be temporarily loaned to the General Fund to alleviate this problem.

The Centinela Valley Union High School District's (CVUHSD) actual General Fund ending balance for FY 1997-98 was approximately 52 percent less than the FY 1996-97 ending fund balance. The projected ending funding balance for FY 1998-99 is 28 percent less than the FY 1998-99 first period interim District certification presented to and approved by the Board of Education on December 8, 1998. As a result, the District is projected to end Fiscal year 1998-99 with a General Fund reserve balance below the State of California minimum reserve level.

As part of this review we analyzed the FY 1998-99 Adopted Budget and the FY 1997-98, FY 1996-97, and FY 1995-96 Annual Financial Statements issued by the District's Independent Auditors. We evaluated the appropriateness of fund balances, reserves, designations, and undesignated surpluses related to the General Fund, Special Revenue Fund, and the Capital Project Fund.

General Fund Balance

As shown in Table 3, the ending General Fund balance for FY 1997-98 was $2,281,819, or 52% less than the $4,794,004 FY 1996-97 ending balance. $214,127 of the FY 1997-98 $2,281,819 Ending Fund Balance was reserved for specific future use, $2,706,995 was designated for future period unconfirmed expenditures, and there was a negative undesignated fund balance of $(639,303). Because the Total Reserved and Designated amount total $2,921,122 and the Ending Fund Balance is less than that amount at $2,281,819, the result is a negative undesignated balance of ($639,303).

Table 3: Analysis of General Fund Balances, Centinela Valley Union High School District, FY 1995-96 through FY 1997-98

Available Reserves at year end in FY 1997-98 were $417,692, comprised of $1,056,995 designated for economic uncertainties and an undesignated balance of $(639,303). This ending Available Reserve balance was only 1.19% of the total operating expenses and transfers at year end in FY 1997-98 as shown in Table 3. The State of California requirement for minimum reserves for school districts with average daily attendance between 1,000 - 30,000 (the District's regular average daily attendance was 5,569 in FY 1997-98) is not less than 3% of total General Fund expenditures, transfers out and uses. (See California Education Code §15456)

For FY 1998-99, the budget adopted by the District's Board of Education in June 1998 was based on an assumed beginning fund balance of $3,942,169 carried over from the previous fiscal year. For a number of reasons, this initial budget was not approved by the Los Angeles County Office of Education. It was revised by the District and approved by the Board of Education in December 1998.

Table 4 shows selected details from the originally adopted FY 1998-99 budget, the budget as revised in December, 1998, and the same information projected for the fiscal year as part of this audit based on more recent information. As shown in the table, the revised December budget included reductions in a number of areas including reserves for construction at Lawndale High and Lloyde Continuation School, textbook enhancement, and potential audit liability.

The December budget reduced Available Reserves (comprised of funds for economic uncertainties and undesignated funds) by $377,102, from $1,570,718 to $1,193,616, or to 3.25 percent of total budgeted operating expenditures, as shown in Table 4. However, the December budget assumed the same beginning fund balance of $3,942,169 as the original budget approved in June 1998. Subsequently, the District's financial auditors have reported numerous year-end adjusting entries, which resulted in a reduction in the value of the beginning fund balance from $3,942,169 to $2,281,819, or $1,660,350 less than assumed in the District's two adopted FY 1998-99 budgets.

Table 4: FY 1998-99 District Fund Balances as Originally Adopted, Revised by the District and Projected Based on More Recent Information

	June '98	December '98	Difference	March '99
	Budget	Budget	(June vs. Dec.)	(Projected)*
Beginning Fund Balance	$3,942,169	$3,942,169	$0	$2,281,819
Reserved:
Revolving Cash	25,000	25,000	0	25,000
Stores	178,000	178,000	0	189,127
Total Reserved	203,000	203,000	0	214,127
Designated for:
Retiree Benefits	1,000,000	1,000,000	0	1,000,000
Lawndale/Lloyde Constr.	250,000	0	-250,000	0
Textbook Enhancement	400,000	0	-400,000	0
Potential Audit Liability	500,000	200,000	-300,000	200,000
Subtotal Designated	2,150,000	1,200,000	-950,000	1,200,000
Designated for Economic Uncertainties	1,229,492	1,101,763	-127,729	1,056,995
Undesignated	341,226	91,853	-249,373	-594,535
Available Reserves	1,570,718	1,193,616	-377,102	462,460
Ending Fund Balance	3,923,718	2,596,616	-1,327,102	1,876,587
Total Operating Expenses and Transfers	$35,398,336	$36,725,438	$1,327,102	$36,725,438
Available Reserves as a % of total
Operating Expenses and Transfers	4.44%	3.25%		1.26%

* Uses audited actuals from FY 1997-98 except for Designated for Lawndale/Lloyde construction, textbook enhancement, and potential audit liability where District budgeted reductions for FY 1998-99

As shown in Table 4, the District assumed the same $3,942,169 beginning fund balance in the December budget as used in the budget approved in June. In the December budget, the District reduced a number of its reserves, so it would still meet the State requirement for Available Reserves equal to 3 percent of operating expenditures. Due to changes in budgeted expenditures and revenues between June and December, the District assumed it would end the year with an ending fund balance of $2,596,616, or $1,327,102 less than the $3,923,718 ending fund balance assumed in the original June budget. Since the revised December budget assumed the same beginning fund balance as the original June budget, which later proved overstated, it appears that District resources were still overstated in December and further reductions in expenditures may be necessary this fiscal year to meet the State minimum reserve requirements, and to have an ending fund balance comparable to those of previous years.

The impact of the beginning fund balance being $2,281,819 instead of the $3,942,169 included in the District's June and December budgets is shown on Table 4. Using the actual FY 1998-99 beginning fund balance of $2,281,819 instead of the $3,942,169 assumed by the District, and assuming operating expenditures and revenues remain the same as included in the revised FY 1998-99 budget, Available Reserves will be only $462,460, or 1.26 percent of operating expenditures as shown in the March 1999 projections column on Table 4. This amount is $639,303 short of the $1,101,763 needed to meet the State 3 percent of operating expenditures minimum reserve level. The District's Available Reserve for FY 1998-99 will not only be below the State of California minimum reserve level of 3 percent, it will be well below the 15.69% Available Reserve level of FY 1995-96 and the 6.39% Available Reserve level of FY 1996-97, shown in Table 3.

The other impact of the reduction in the beginning fund balance for FY 1998-99 is that there will be a smaller ending fund balance at the end of FY 1998-99 than originally budgeted. This means that there will be relatively fewer dollars available for FY 1999-00 expenditures than has been available from carried over funds in previous years. As shown in Tables 4 and 3, the projected FY 1998-99 ending fund balance will be only $1,876,587 compared to $2,596,616 assumed in the December budget, $2,281,819 in FY 1997-98 and $4,794,004 in FY 1996-97.

Special Revenue Fund Balance

Unlike the General Fund, with declining end of year fund balances, the District's Special Revenue Fund's end of year fund balance has been growing over the last three years. For FY 1997-98, the Special Revenue Fund's end of year fund balance was $3,129,505, more than appears necessary and a portion of which could potentially be loaned to the General Fund. Of the $3,129,505 in the year end fund balance for FY 1997-98, only $2,000 was reserved. The remaining balance of $3,127,505 was undesignated. Table 5 summarizes the District's Special Revenue Fund for the last three fiscal years.

The Special Revenue Fund is comprised of three sub funds: 1) the Adult Fund; 2) the Deferred Maintenance Fund; and, 3) the Cafeteria Fund. The $3,127,505 in undesignated reserves includes a balance of $1,656,559 for the Adult Fund and $1,376,709 in the Deferred Maintenance Fund. As of June 30, 1998 the Special Revenue fund had a cash balance of $3,395,155 that includes $2,111,288 in the Adult Fund and $1,177,520 in the Deferred Maintenance Fund.

Table 5: Special Revenue Fund Analysis

Designated ending fund balances are set aside by Board action for a specific future use. The Deferred Maintenance Fund is used to replace or repair District property. $1,376,709 of the Deferred Maintenance Fund is undesignated and could be loaned to the General Fund if necessary to alleviate shortfalls in that fund such as the lack of funds needed to meet the State mandated 3 percent minimum reserve requirement, as discussed above. The FY 1998-99 adopted budget for the Deferred Maintenance Fund projects revenue of $168,489 and expenditures of $610,000. The cash balance is almost twice the amount of total expenditures projected for the year. There is no need to maintain a cash balance that is almost two times the total appropriations authorized by the Board of Education.

In FY 1992-93, the District made a loan from its Deferred Maintenance Fund to the General Fund to offset a forecasted General Fund deficit. This loan and a repayment was approved by the District Board of Education and Los Angeles County Office of Education and State officials. While this is not the most desirable way of offsetting General Fund shortfalls, as it requires repayments with interest in future years, it is a source that could help the District get through its potential shortfall in FY 1998-99 and then improve its planning process for future years.

Recommendations

It is recommended that the Board of Education:

1. Assess District needs and projected General Fund shortfalls for the current and next fiscal year, and, depending on this analysis, develop a plan to loan and repay up to $1,376,709 in reserves from the Special Revenue Fund to the General Fund.

2. Present plan for one time uses of transferred funds to Board of Education for review and approval, and obtain approvals form all necessary bodies such as the Los Angeles County Office of Education and the State.

Adequacy of Budget Information

The budget information currently available to administrator and the Board of Education is not adequate to monitor the financial status of the District.

CVUHSD receives monthly cumulative reports prepared by the Los Angeles County Office of Education (LACOE). These reports are based on information provided by the CVUHSD accounting department and contain the following data fields:

• object code and description;

• adopted budget;

• expenditure transactions individually and cumulatively;

• encumbrances;

• · budget balance; and,

• percent of budget balance remaining.

These reports provide valuable information needed for the management of any business or government entity. Although the reports issued by the County are valuable on a District-wide perspective, they do not provide detail at the cost center or site level and the District's internal financial tracking systems do not have information at this level either. This weakens the District's ability to accurately control and monitor expenditures at the District, school or divisional levels.

The reports produced by LACOE present financial data at the major object code level versus the sub-object, or minor object, code level. For example, object code 56000 is for rentals, leases and repairs of equipment throughout the District. Within this object code there are an estimated 100 sub-object codes for various user sites. This object code had a budget of almost $550,000 for FY 1997-98 and an estimated $540,000 in expenditures. A review of FY 1997-98 expenditures in the 100 sub-object codes revealed that only a few of those with reported expenditures had amounts actually budgeted in them based on the budget adopted July 1, 1997. During the course of the year as monies were spent, transfers were made from the main object code to the various sub-object codes.

The District should engage in budget planning at the sub-object level prior to adopting the budget. This would allow administrators to monitor spending levels on a monthly basis by site, division, and District-wide. We inquired into this and were told that this was a problem they were aware of, which was created because the prior administration did not budget by sub-object codes.

Recommendations

It is recommended that the Superintendent:

1. Instruct the accounting department to develop procedures and reports that will provide budgetary information for schools and district divisions by sub-object to monitor monthly.

2. Provide monthly budget reports to the Board of Education with detail available by school, division, and sub-object.

Other Financial Information

The District has been relieved of its obligation to contribute to the State retirement system for its classified employees due to the retirement fund being sufficiently funded for the current and next fiscal year. While this provides the District with an opportunity to use funds previously allocated to retirement for other purposes, the availability of these funds should be considered temporary and not used for ongoing costs.

The CVUHSD contributes to the California Public Employees Retirement System (PERS), a multiple-employer public employee retirement system that acts as a common investment and administrative agent for participating public entities within the State of California. These contributions are for all eligible classified employees. As of June 30, 1997, the District employed 357 classified employees.

PERS keeps measurement of assets and pension benefit obligations based on local educational agencies as a whole. The total unfunded pension benefit obligation for local educational agencies as a whole as of June 30, 1997, was as follows:

Total Pension Benefit Obligation $17,583,430,000

Actuarial Value of Asset 21,149,200,000

Pension Surplus $(3,565,770,000)

As can be seen above, the State agency's net assets available for pension benefits of $21,149,200,000 is $3,565,770,000 more than its total benefit obligation of $17,583,430,000. While the District can not obtain a refund of excess contributions, its requirement for future contribution will be eliminated for the current and subsequent fiscal year. This compares favorably to contribution rates of the last two fiscal years as shown in Table 6.

Table 6: Actuarially Required Retirement Contributions, Centinela Valley Union High School District

FY 1996-97	FY 1997-98	FY 1998-99	FY 1999-2000*
7.72%	6.172%	0%	0%

As can be seen from the preceding table, the CVUHSD required contribution has dropped from 7.72% in FY 1996-97 to a zero contribution rate required in FY 1998-99. These reductions are due to the high investment returns on assets previously contributed. Since PERS had a 19.5% investment return for FY 1997-98, and although the State would not confirm this, it appears that a contribution from the District will not be required again in FY 1999-2000.

Since the District's contribution to PERS for the fiscal years ending June 30, 1998, 1997, and 1996 were $314,154, $305,872, and $227,467 respectively, by having no contributions for FY 1998-99 and FY 1999-2000 the District has a large cost savings that will not have to be budgeted in FY 1999-2000. It is conceivable that zero or very small contributions will be required for the next few fiscal years. However, this situation can change in the future as the PERS "surplus" is dependent on a variety of external variables.

While the current situation provides additional resources for the District to use for purposes other than retirement, these funds shouldn't be used to cover ongoing District costs. The District's financial managers and budget should identify the amounts made available from this source and ensure that they are used only for one-time purposes so that the District will be able to pick up its classified employee PERS contributions again in future years without having to reduce funding to other ongoing programs or services.

Recommendation

It is recommended that the Board of Education:

1. Adopt a policy requiring District management to clearly identify avoided PERS contribution amounts in the annual budget and the temporary or one-time purposes for which those funds will be used as long as PERS contributions are not required.

COST SAVING OPPORTUNITIES

The Centinela Valley Union High School District (CVUHSD) is not in compliance with the California Public Contract Code requirement for formal competitive bidding. Common in other organizations, the District does not routinely obtain more than one vendor quote for purchases that are less than the amount required by the State for competitive bidding but are of such amounts that the District would benefit from obtaining competitive quotes. As a result, CVUHSD may not be making purchases at the lowest possible cost to the District.

The CVUHSD is required to act in accordance with the State of California Public Contract Code Section 20111, which as of January 1, 1998 states than an expenditure of more than $52,900 for the lease or purchase of equipment, materials, supplies or services (except construction services) must be competitively bid. On January 1, 1999 this limit was increased to $53,900. For public project contracts such as construction and maintenance jobs, competitive bidding is required if the amount is $15,000 or more.

Formal bidding procedures include sending Invitations to Bid to vendors in the mail and receiving written vendor bids in the mail, all opened in a public process at a pre-determined time. Unless otherwise authorized by law, contracts are to be awarded to the lowest responsible bidder. Additionally, CVUHSD Business Policy 3311 (a) provides that "care shall be taken to observe all statutory requirements for bidding and bidding procedures". It is also stated the District should solicit formal bids whenever it appears to be in the best interest of the District to do so.

The objective of any school district's procurement function should be: to efficiently provide schools and operating departments with the goods and services they need in the right quantity, at the right quality, on a timely basis, and at the lowest overall cost. To achieve these objectives, the purchasing function should have the following attributes:

• As much competition as possible should be incorporated in to the process to ensure that the lowest possible prices are being achieved;

• Procurement planning should take place on a regular basis such an annually to enable consolidated purchases of like orders and arrangement of volume discounts;

• Past performance and cost information about vendors should be maintained and utilized in selecting vendors and products.

As one method of evaluating the degree to which the District Purchasing Department are achieving the objectives stated above, we reviewed all purchase orders for FY 1997-98 and FY 1998-99 to determine if the District was in compliance with California contract codeSection 20111 requiring competitive bidding over certain dollar thresholds, as described above. Our review revealed that a requisition and purchase order for a public project was issued 8/4/98 totaling $34,500. This purchase order was subsequently cancelled and replaced with two new requisitions and purchase orders, one for $14,995 and one for $18,800. The purchase order for $18,800 was sent to the Board of Education and approved by Emergency Resolution on August 25, 1998. By the Board declaring a procurement an emergency, the District is relieved from State competitive bidding requirements. Based on discussions with District personnel, the consulting Assistant Superintendent of Business at the time instructed the staff to issue two separate purchase orders.

By splitting these purchase orders, the purchase order for $14,995 did not require competitive bidding (the State threshold amount being $15,000 for these type of expenditures) and did not have to be presented to the Board of Education for declaration of an emergency resolution. District staff state that the vendor performed these services in September 1998. Based on the original purchase order date of August 4, 1998, there was probably sufficient time for the competitive bidding process, or at the minimum, additional vendor quotes could have been obtained to determine if the District was obtaining the lowest price available for this service.

Our review also revealed seven public project purchase orders issued that required competitive bidding but were issued to sole source vendors under emergency resolutions. The following is the service performed and the amount paid:

Although these services may have been deemed necessary to complete either prior to classes beginning or soon after, it would have been prudent to obtain quotes from more than one vendor. Without obtaining competitive quotes or bidding for most purchase orders, the objective of knowing if the lowest possible price has been obtained is drastically reduced. With proper facility maintenance planning, it should not be necessary for procurements such as these to be issued on an emergency basis.

As stated above, our review revealed that the District does not obtain more than one vendor quote for purchases that are less than the amount required for competitive bidding but are of such an amount that cost savings could still be realized through obtaining competitive quotes. There is no District policy that requires the District buyer to obtain competitive or informal quotes (see Finding below for further discussion). Therefore, purchases are made without the benefit of comparing costs between two or three vendors. Two significant purchase examples where only one quote was obtained are:

$12,000 for acid wash and cleaning of the locker rooms at Leuzinger;

$14,900 for gum removal at Leuzinger.

It is also noted that, based on documents reviewed, it would appear that the acid cleaning charges were questionable. If more than one quote had been obtained for this service, the District would have known if they were receiving this service for a reasonable amount.

Recommendations

It is recommended that the Superintendent:

1. Direct the Purchasing Department to comply with the State of California Public Contract Code 20111 requiring formal competitive bidding for purchases from vendors that are expected to exceed $53,990 and public project contracts exceeding $15,000.

2. Adopt a purchasing policy requiring a minimum of two vendor quotes for all purchases greater than $500 but less than the threshold amounts that trigger competitive bidding requirements under State law.

POTENTIAL VENDOR CONTRACT OPPORTUNITIES

The CVUHSD Purchasing Department should enter into contracts with vendors with whom the District makes repeat purchases during the year that, in aggregate, are significant amounts though less than the $53,900 threshold that triggers State mandated competitive bidding. Price discounts should be requested in these contracts based on the District's expected volume. Based on a review of District vendor files, we estimate that savings of at least approximately $14,000 could be achieved annually.

As described previously, formal bidding is required for expenditures of more than $53,900 for the lease or purchase of equipment, materials, and supplies. For purchases of less than this amount the Purchasing Department is not required by the State to obtaincompetitive bids or quotes. However, a policy should be adopted to enter into contracts with vendors where the District's aggregate expenditures over the year are substantial though less than $53,900 because it would enable the District to purchase items at discounted prices based on volume.

A policy such as this could be adopted for vendors that the District knows will be used frequently or for commodities that will be in high demand throughout the year. The benefits of contracting in these instances, are: 1) more favorable prices can be negotiated based on anticipated volume; and 2) individual purchases from a pre-selected vendor will be less time consuming as the terms and conditions of the purchase already have been established. Whether they result in a contract or not, purchases of less than $53,900 are not subject to the formal bidding requirements. Instead, the District can administer an informal bidding process such as obtaining quotes over the telephone.

We reviewed the District's detailed accounts payable reports for FY 1997-98 and FY 1998-99 to identify potential high volume vendors or commodities where numerous purchases were made. We identified a number of vendors whose aggregate purchases were in excess of $15,000. It would be in the best interests of the District to establish contracts and price discounts with these vendors given the high volume of orders placed with them.

Table 7 is a summary of vendors with whom the District spent more than $15,000 during calendar year 1998, but did not have a contract in place specifying price discounts or other terms and conditions.

Based on our review, we recommend that the CVUHSD pursue contract negotiations with the vendors listed. We believe the District could achieve a conservative 5% price discount from these vendors resulting in estimated annual savings of approximately $14,041. Additional administrative cost savings could be anticipated by reducing the number of purchase orders issued.

Table7

Vendors whose Aggregate Sales to the District Exceeded $15,000 but did not Have Contracts in Place for Discount Prices

Recommendations

It is recommended that the Superintendent:

1. Direct the Purchasing Department to pursue contracts for the applicable commodities and/or the vendors identified in Table 7.

2. Direct the Purchasing Department to review all purchases and accounts payables to determine if there are additional contract opportunities and/or price discounts for vendors with aggregate purchases.

3. Report to the Board of Education within six months the status of negotiating new vendor contracts and their monetary savings as discussed in this section.

Cash Discounts

The CVUHSD is losing cash discounts offered by vendors because payments are not being made before the expiration of the discounts period. Additionally, based on the small number of vendors offering cash discounts, the Purchasing Department needs to aggressively pursue vendors during the procurement process that will offer cash discounts if payment is made promptly for the goods and services they are offering. This should result in annual savings of at least $2,500.

Contracts and purchase orders that are issued by the Purchasing Department are paid for through one of two CVUHSD accounts payable departments. Food Services Accounts Payable processes all payments related to purchases of services and supplies for the Cafeteria Fund. District Accounts Payable is responsible for all other accounts payable within the District.

Cash discounts are normally offered by vendors to clients to entice them to pay more quickly for the services and supplies provided. These discounts can be deducted from the total cost of the invoice if they are paid within the terms stated on the invoice or contained in the purchase order or contract. In most instances a cash discount is given by a vendor if payment is made within 10 or 20 days from the date of invoice or date of delivery, or by the 10^th of the following month and usually involves either a 1% or 2% discount. Invoices without discounts offered are called "Net 30" where the net amount due is to be paid within 30 days.

During our review of District accounts payable vendor files we found two vendors who offered cash discounts if paid within a certain time period, but their discounts were not taken by the District. District Accounts Payable staff stated that only one vendor was known to offer discounts. Discounts for this vendor are not currently being taken because the submission of payment and receiving documentation was received from the end user site too late to process the discount. The other vendor discount was not taken because the clerk simply didn't see the cash discount offer on the invoice. Calendar year discounts lost for these two vendors were $676.

The Accounts Payable department should carefully review all invoices and purchase orders to determine which vendors are offering discounts and promptly process the payment. The timing problem described above could be addressed by instructing all District employees of the importance of timely submission of receiving documents. Additionally, Accounts Payable should produce a quarterly listing of all vendors identified as offering discounts and distribute this to all departments responsible for forwarding documents.

We believe there could be an increase in the number of vendors offering cash discounts to the District that should result in additional annual savings of a minimum of $2,500. The Purchasing Department should be instructed to aggressively pursue discounts with a higher percentage vendors than the current number.

Recommendations

It is recommended that the Superintendent:

1. Direct the Accounts Payable to (a) identify all vendor discounts; (b) pay vendors timely to take advantage of vendor discounts; (c) prepare a quarterly report distributed to District employees listing vendors identified as offering cash discounts.

2. Instruct the Purchasing Department to aggressively pursue discounts with a higher percentage of vendors than the current number.

3. Report to the Board of Education within six months with the results of the above recommendations.

Telephone System Improvements

The CVUHSD telephone system is being abused by employees and students. District long distance records from FY 1997-98 show that numerous calls were made from District phones to 27 states with no accounting for who made the calls or their business purpose. By preventing telephone abuse it is estimated that $3,100 could be saved annually.

During our review of the CVUHSD accounts payable vendor ledgers we became suspicious of the high cost of telephone bills the District was paying. A review of some of the monthly phone bills made from the District and schools revealed a high cost of long distance and toll calls to numbers within and outside California, some of which appeared to have been personal. By preventing telephone abuse it is estimated that $3,100 could be saved annually.

Because there were numerous calls to various cities within and outside California, it seemed unlikely that the District or the schools would have ongoing business to the extent identified. Numerous long distance calls were made to the following 27 states during FY 1997-98:

This finding was discussed with the District Accounts payable staff who informed us that an analysis was recently performed of the District's telephone charges for FY 1998-99 showing the amounts paid for telephone services. Long distance phone bills paid to AT&T from July 1998 through January 1999 totaled an estimated $9,000. Annualizing these long distance phone calls amount to an estimated $15,429. Our discovery was initially identified in the FY 1997-98 telephone bills.

The Finding was discussed with CVUHSD staff who acknowledged that there may be a problem in this area because the District does not have any centralized control or management of telephone services and costs. The Assistant Superintendent stated that a request has been made to the District's employee in charge of communications to begin an investigation identifying all telephones and lines. They also were aware that at the present time there are no access restrictions in the District that prevents personal long distance phone calls.

In order to resolve this problem and to minimize any future costs related to the misuse of District telephones, the District needs to take several corrective actions, which include developing and implementing new telephone usage policies and procedures. Currently the District does not have a written policy to provide guidance to employees or students on the personal usage of District telephones. Such a policy should address the following issues:

• The type of personal calls permitted free of charge without reimbursement.

• The type of personal phone calls that require reimbursement by the employee, and the method of such reimbursement.

• A general discussion of what is a reasonable and allowable frequency and duration of personal calls.

• The types of personnel actions and penalties for violation of the District's established telephone usage policies.

• The departmental responsibilities for monitoring and enforcing the District telephone usage policies.

In addition to developing written District-wide telephone usage policies and procedures, the District should implement access restrictions on all District telephones. Since the District purchased a modern telephone system recently, most District telephones could be programmed to limit access of each specific telephone.

Comparisons with an audit recently performed in Santa Clara County regarding employee abuse of telephone privileges which revealed an estimated 20% of the long distance phone calls were personal, it is estimated that $3,100 could be saved annually if unauthorized long distance phone calls could be prevented.

Recommendations

It is recommended that the Superintendent:

1. Develop and implement written policies and procedures to ensure the appropriate usage of District telephones as described in this section.

2. Direct the Communications department to implement telephone access restrictions on all District telephones.

3. Direct the Communications department to identify all District telephones and lines and terminate service for all telephones that are identified as unnecessary.

4. Direct all District departments to monitor telephone usage and enforce District telephone policies and procedures once such policies and procedures are developed.

5. Report to the Board of Education in three months with the results of these recommendations.

PURCHASING POLICIES AND PROCEDURES

The CVUHSD does not have a policy and procedures manual to assist new and existing staff with carrying out the purchasing function. As a result, there is less certainty that the purchases made by the District will be carried out correctly and expeditiously. Additionally, the purchasing process is not adhering to the Board of Education's policies regarding the authorization of expenditures.

There are many common reasons, irrespective of individual organizational goals and objectives, which substantiate the importance of developing and maintaining organization policies and procedures. These include the need to:

• develop a permanent, on-going record and to make the organization of this record known to all staff;

• develop standardized practices to be employed by all members of the organization in carrying out daily assignments and activities;

• ensure consistency over time of the practices used by all members of the organization;

• have written standards by which both organizational and individual performance can be measured and through which accountability can be established; and

• disseminate information throughout the organization and to create, eliminate or modify organizational practices on a timely basis.

Examples of problems resulting from the absence of procedures were identified during our review of the purchasing function. Some of the problems identified and discussed in other sections of this report include the following:

• the District does not solicit formal bids when it appears to be in the best interest of the District to do so;

• purchase orders that should be competitively bid were split into two purchase orders, thereby avoiding the competitive bid process mandated by Public Code 20111;

• only one vendor quote is obtained for purchases;

• contracts are not pursued for frequently purchased items or services under the competitive bid threshold that could result in lower prices;

• no directive has been issued related to staff obtaining cash discounts from vendors for prompt payment;

• lack of instructions to the receiving department to forward receiving and invoice documents to accounts payable promptly to process cash discounts;

• instructions to accounts payable to process payment prior to expiration of the discount period.

The purchasing process begins when an "end user" prepares a requisition that is approved by a school principal or district administrator. Following authorization, the requisition is sent to the District office for review and approval by the purchasing and accounting department. Board Policy 3310 provides that the Superintendent and the Assistant Superintendent are designated as the district officials to sign purchase order for the district. However, our review of the FY 1996-97 requisitions and purchase orders revealed that the majority of the purchase orders were approved by the purchasing agent. This Board Policy was adopted in 1986 and needs to be amended if the expending authority is going to be someone other than the Superintendent or Assistant Superintendent.

Recommendations

It is recommended that the Superintendent:

1. Direct staff to complete the development of its purchasing policies and procedures manual.

2. Review and update the current Governing Board purchasing policies and procedures to incorporate the new purchasing policies and procedures.

3. Report to the Board of Education within three months the status of the revised purchasing policies and procedures manual.

It is recommended that the Board of Education:

4. Amend the Governing Board policies and procedures subsequent to approval of the purchasing policies and procedures manual.