Five Recommendations to Solve LAUSD’s Looming Fiscal Crisis
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Commentary

Five Recommendations to Solve LAUSD’s Looming Fiscal Crisis

The process of right-sizing Los Angeles Unified School District presents an opportunity to lay the foundation for a 21st-century education system that’s productive, agile, and responsive to the needs of students.

These recommendations are excerpted from the policy study “A 2018 Evaluation of LAUSD’s Fiscal Outlook.” 

From the Independent Financial Review Panel’s report of Los Angeles Unified School District emerges a dire picture that should alarm parents, educators and community stakeholders alike. It found that maintaining the status quo would grow the budget deficit to about $600 million by 2019–2020, concluding that failure to act would have real ramifications for the district’s 550,000 students including financial insolvency and even state takeover. For years district officials have avoided substantive reforms, but the warnings of distant fiscal calamity have now become a reality that leaders must address head-on. While the path ahead involves many difficult decisions and political headwinds, the process of right-sizing LAUSD presents an opportunity to lay the foundation for a 21st-century education system that’s productive, agile, and responsive to the needs of students and communities. In other words, right-sizing isn’t about budget cuts and layoffs, but rather optimizing all facets of operations with the goal of providing high-quality options to all students at a cost that aligns with revenues. To do this, LAUSD leaders should focus on five key reforms.

#1 OVERHAUL LONG-TERM DEBT OBLIGATIONS

LAUSD has little control over rising pension contributions because reducing these obligations requires state-level reforms. However, general staffing surges that are not supported by enrollment can increase pension costs, since the district must make pension contributions for each new hire.

Further, LAUSD does have discretion over OPEB costs as well as health and welfare benefits for active employees. The district has several significant cost-saving options available to it, ranging from ending retiree health care benefits altogether to engaging in a variety of cost-sharing and cost-reducing strategies.

At its August 2017 board retreat on reducing health care costs, LAUSD staff presented five cost-saving options, as shown in Table 20.

Ultimately the board upheld the status quo for health care benefits for another three years at an annual cost approaching $1 billion.

#2 GO AFTER LOW-HANGING FRUIT

It should come as no surprise that LAUSD can become more efficient, but what’s less obvious is how relatively minor changes in operations can result in substantial savings that can put a dent in the district’s budget deficit. In fact, the Independent Financial Review Panel’s report found over $143 million in potential savings outside of staffing and long-term obligations, including:

Improve student attendance ($45 million): Because the state of California provides revenue based on Average Daily Attendance, LAUSD loses money with every student absence from school. Increasing the district’s attendance to just the statewide average—a relatively low bar to achieve—would generate an additional $45 million per year. Of course, this would not only help boost LAUSD’s bottom-line but also improve academic outcomes such as graduation rates and college and career readiness. In 2009–2010, Long Beach Unified shifted 10 of its social workers and counselors to working with campuses on truancy issues to increase student attendance. The chronic absence rate in Long Beach Unified dropped from 19.8 percent in 2011 to 10 percent by 2014. By 2015, the school district’s overall attendance rate was 96.17 percent up from 96.01 percent in 2014 and above the state average.

Improve staff attendance ($15 million): Currently, only 75 percent of LAUSD staff members have strong attendance as defined by the district. Bolstering this number to 90 percent would save about $15 million on substitute teachers while also providing students with more stable classroom environments. To save even more money, LAUSD could require select administrators to substitute teach five days per year, a policy that saved Scottsdale, Arizona about 7 percent of their substitute budget and also allowed district staff to stay connected to the classroom.

#3 INITIATE STAFF REDUCTIONS AND STRATEGIC SCHOOL CLOSURES

The reality is that LAUSD’s financial quagmire requires district leaders to make substantive cutbacks in both staffing and schools. Even though its declining enrollment has necessitated a reduction of about 10,000 staff, LAUSD has actually increased staffing levels in recent years while seeing costs associated with salaries and benefits also rise. This problem will only magnify if projected enrollment declines continue to hold true.

To start, LAUSD must recognize that the lion’s share of new hires have been administrative staff, even during declining enrollment. Therefore, district officials should first evaluate every central office staff position as part of its school finance overhaul.

Next, teacher layoffs are unavoidable but LAUSD can approach them in a manner that will help increase student outcomes even as overall staffing levels decrease. Importantly, district and union officials should work together to review and renegotiate factors that hamstring flexibility and do nothing to further student achievement, such as automatic pay increases, rigid staffing requirements, and termination provisions that favor costly teachers with seniority. For example, Boston Public Schools replaced a seniority-driven system by renegotiating its collective bargaining contract to give more autonomy over staffing to school leaders, and Hartford Public Schools’ contract now provides principals with more flexibility over things such as scheduling. Increasing district and school-level flexibility will not only minimize staff reductions and protect against future layoffs, but also help ensure that the district retains its highest-performing talent in the process. LAUSD should also follow the Independent Financial Review Panel’s guidance by offering early retirement incentives to senior staff and help reduce the percentage of teachers who have reached the maximum salary level, which is currently 10 percent higher than the state-wide average.

Lastly, underutilized schools are costly for districts to maintain as fixed costs such as facilities, school administration, and custodial services increase per-pupil expenses as enrollment declines. This means that schools that are at or near capacity—which are often higher-performing—essentially subsidize schools with declining enrollment and have less funding to expand programs, services and enrollment as a result. Undoubtedly, closing schools is a difficult yet necessary process for LAUSD to undertake, but district officials should prioritize closing underperforming schools and proactively engage communities throughout the process in order to maximize transparency and build understanding. Kansas City Public Schools closed 26 schools and laid off about 1,000 staff members in 2010, which ultimately helped the district close its budget deficit, improve academically, and reverse enrollment declines, as students transferred to higher performing schools. According to Superintendent R. Stephen Green, “When you close a number of facilities, it creates a bit of disruption, but it was a much-needed process to go through, given the financial stability that was needed for the district.”

Los Angeles also has declining enrollment without ensuring that all school sites are self-sustaining. While many other large urban districts with significant enrollment declines have worked to close and realign some schools to save money, LAUSD continues to keep under-enrolled schools open, even as it has opened many new schools over the last decade. In some areas of the district where school sites are very close to one another, the older schools have lost enrollment to newer schools. The district has not released a transparent recent report about the current capacity from one school to another or identified which schools may be under-enrolled and subsidized by the district.

The key question is to examine whether a school has enough enrollment to sustain the cost of running the school. In 2008, the district estimated that its schools would have a 16 percent vacancy rate by 2012. It predicted it would have the capacity to seat 670,000 students, but only 560,000 were expected to enroll. A Los Angeles Times analysis in 2008 noted that “the district plans to build campuses that will take hundreds of students from those schools, further reducing their enrollment. By the time the building program is completed in 2012, there will be tens of thousands of empty seats at dozens of once-crowded schools.”

If we assume that LAUSD still has the capacity for 670,000 seats, then the current enrollment level of 500,000 students means that it is past time for the district to do a transparent audit of school capacity and how it might save money by closing the most under-enrolled schools. Independent charter schools have used some of this excess capacity for their students, but a transparent examination would ensure that the district can accurately assess all its financial options. In addition, evidence shows that closing the lowest performing and most under-enrolled schools can improve the quality of education for the most disadvantaged students.

A growing body of research indicates that school closure increases educational opportunity so long as students have access to better schools. Closure students who attended better schools tended to make greater academic gains than did their peers from low-performing schools in the same sector that remained open.

A new report on LAUSD’s real estate assets by the LAUSD Advisory Task Force calls for the district to “analyze the current occupancy of core District assets to determine whether consolidation of and/or relocation of certain tenants to more optimal locations could create savings, maximize revenue, and/or reduce functional obsolescence.” With a more thoughtful approach to managing individual school sites and vacant property, the district could actually raise money with long-term leases to charter operators or with other commercial or community uses of their underutilized real estate assets. In addition, school consolidation could help ensure every school has more qualified staff, rather than distributing LAUSD’s scarce resources over too many school sites.

When LAUSD keeps open schools that are under-capacity, district-wide personnel may continue to grow while individual school communities feel staff shortages at the school level. This is because each school, independent of enrollment, requires a certain fixed number of staff positions, some of which may be vacant as enrollment shrinks. As the Los Angeles School Report noted in a May 2016 feature, former Superintendent Michelle King cited feedback from a principals’ survey she received that “showed principals expressing frustration with a lack of clerical staff, a lack of time to complete tasks and limited opportunities for instructional training. ‘Principals say there are not enough hours in the day to get everything they need done and improve teaching and learning due to a lack of sufficient personnel,’ King said.” In this way, the district can have too many employees that are unsustainable given the current level of enrollment and district revenue, while individual schools can also be under-staffed and stretched thin.

But when schools consolidate, fewer fixed staff positions are needed and are more likely to be filled. The district is staffing too many schools at an inadequate level and could increase staff and school support at individual schools by consolidating and closing some schools. LAUSD needs to make a transparent accounting of site-based enrollment, spending, and revenue based on the students who are enrolled at each site, examine how each school uses resources, and determine how that impacts the district as a whole. Until that is accomplished, the district will continue to have too many staff members that are not effectively deployed to best serve the needs of students.

#4 MITIGATE ENROLLMENT DECLINES BY FOCUSING ON QUALITY OPTIONS

Over a six-year period, LAUSD’s enrollment fell by nearly 100,000 students, about half of which is due to families choosing charter schools, with many others opting to enroll in traditional public schools outside of the district. With forecasted student attrition of 2.8 percent per year and lackluster outcomes in many of LAUSD’s schools, fundamental changes within classrooms are clearly in order. The Independent Financial Review Panel found that “there may be lessons to be learned from the migration of students to charter schools” and “it is very important that the District carefully analyze charter programs and focus on which students are leaving and why” so that LAUSD can ultimately improve its programmatic offerings for families. More bluntly, the days of district monopoly and residential assignment are coming to an end, and if LAUSD is going to attract and retain students then officials must be more responsive to parent needs. Fortunately, numerous districts across the U.S. have already undertaken substantive reforms to adapt to this new operating environment, and LAUSD has much to learn from them. One prominent example is Denver Public Schools (DPS).

DPS has adopted “portfolio management,” a model in which a district’s primary role is to approve operators, provide support, and evaluate school outcomes. Portfolio management is based on the belief that school-level autonomy drives performance by allowing school leaders and teachers to more effectively meet student needs. While traditional districts tend to prescribe a one-size-fits-all model by mandating inputs (e.g. staffing ratios, curriculum, etc.) portfolio management recognizes that each school has unique challenges and is thus more concerned with holding educators accountable for outcomes rather than how they operate. Ultimately, this helps to promote a diverse supply of schools that, when combined with a strong intra-district choice policy, can give parents more meaningful options that in turn help improve overall satisfaction and retention. As part of its strategic roadmap, The Denver Plan 2020, DPS is striving to have 80 percent of its students attending a high-performing school by 2020.

New data by the advocacy group Parent Revolution show that 234 LA Unified schools scored in the bottom two levels — orange or red — for both English and math on the California accountability dashboard. In the 2016–2017 school year, 155,779 students were enrolled in those 234 schools. LAUSD has 34 schools that are red in both English and math. Last year those schools enrolled 26,400 students. At a minimum, 30 percent of LAUSD students could use a higher-performing school.

#5 MODERNIZE THE DISTRICT’S SCHOOL FINANCE SYSTEM

Currently, LAUSD employs an antiquated school finance system. Instead of providing principals with actual dollars based on students, it allocates staffing positions that are determined using rigid ratios and district-wide average salaries. As Marguerite Roza of Georgetown University’s Edunomics Lab explains, “The district sends out teachers, principals, administrative assistants, lunchroom staff, librarians, and the like, and pays the bills out of the district coffers. Schools do not have their own bank accounts, nor do they receive reports that show the true costs of the resources that land in their buildings.” As well, according to Harvard researcher and former LAUSD budget director Jon Fullerton, the district’s budgeting systems “do not connect automatically with accounting systems, and both may be isolated from the human-resources systems that track who is hired, when, and for how much.” As a result, funding is delivered to schools in a manner that is non-transparent, inequitable, and less responsive to enrollment changes. This makes it difficult to provide leaders with valuable data that could help the district become more productive with its education dollars.

STUDENT-BASED BUDGETING

To modernize its school finance system, LAUSD should allocate dollars on a per-pupil basis by adopting student-based budgeting, a funding portability framework that sends dollars to schools rather than staffing positions. This not only promotes equity and portability across schools within the district, but it also empowers principals to have more decision-making authority over how dollars are ultimately spent. Allocating funding to schools in per-pupil terms would promote greater efficiency by allowing dollars to grow and contract in direct proportion to student needs. In this way, student-based budgeting would allow principals to make their schools more responsive to parents’ needs, increasing the likelihood of higher enrollment and potentially generating new revenue at the school level.

Moreover, when money goes directly to schools on a per-pupil basis, it becomes clear which schools are unable to financially sustain themselves and which schools may be candidates for consolidation to avoid insolvency. As part of this shift, LAUSD can also empower principals to purchase certain services from either the district or external vendors to optimize pricing and quality, which are often constrained by district contracts. This allows school leaders to make better use of their budgeted dollars while also helping to address central office bloat. Given LAUSD’s financial position and need to reduce personnel, student-based budgeting would allow school-level staffing based on the funding resources generated by the students in the school.

Student-based budgeting is based on five key principles:

  1. Funding systems should be as simple and transparent as possible.
  2. Per-pupil funding should be based on the needs of each student.
  3. Per-pupil funding should follow the student to the public school of their choice.
  4. Principals should receive actual dollars—not staffing positions or other allotments—to spend flexibly based on school needs.
  5. Funding allocation principles should apply to all sources of education revenue.

It requires a shift in mindset from top-down compliance to supporting autonomous school leaders, and some roles will fundamentally change or become obsolete in this new environment as a result. As one educator who participated in an Education Resource Strategies summit on school-level budgeting explained:

There has been a philosophical change: the principal is the CEO of the school. The central office is there to support them. We inverted the pyramid so that the principal is on top, telling the central office what they need, rather than on the bottom. That’s required a cultural change and huge structural changes in the district.

LAUSD has already laid the foundation for this reform by piloting autonomous schools through its Belmont Pilot Schools Network, which started in the 2007–2008 school year. In the 2017–2018 academic year LAUSD allocates $46 million to 83 schools that receive their resources based on a per-pupil formula that is allocated directly to schools. In these schools, principals have more autonomy to purchase school-based staffing and differentiated district support. LAUSD should take the next step by adopting a district-wide program as numerous districts such as Boston Public Schools, Houston Independent School District, and New York City Department of Education have already done.

THE CHANGING ROLE OF THE DISTRICT

Under a student-based budgeting system, the district itself still monitors school performance and makes big-picture decisions about which schools may need to be closed or consolidated based on enrollment and academic performance. The district’s new role would be to hold individual schools accountable for district-wide student goals, such as improving graduation rates or increasing proficiency in 3rd-grade reading. The district would not mandate how a principal and school community use their resources to meet district-wide instructional
goals, but would instead set the benchmarks and goals for the district.

In order to measure progress and monitor performance, LAUSD should revamp its knowledge infrastructure to better integrate key information systems. This means going beyond merging budgeting, accounting and human resource data by ensuring that student enrollment and achievement data are also readily available for cross-referencing analysis. This would ensure that individual school leaders and district leaders have the tools necessary to make sound financial decisions that are driven by academic strategy and outcomes.

For example, district leaders should know not only exactly how much is spent on each school but also how dollars are allocated across classrooms and courses. Disaggregating data to per-pupil terms at the classroom-level would help school leaders and district administrators assess the alignment of funding with strategic instructional intent and student outcomes, and more effectively consider trade-offs in how money is spent. This is especially important since research has shown that districts allocate funding in a manner that doesn’t align with stated priorities such as focusing on low-achieving students, a fact that leaders are often unaware of given antiquated accounting and budgeting practices. For example, a district may say its goal is to improve 3rd-grade reading and then spend all of its resources on high school AP classes. Without attaching school- and classroom-level expenditures to instructional priorities, school leaders, and districts have little information about how they are targeting resources to instructional priorities.

Such transparency would help LAUSD’s current measurement of progress, as the district doesn’t track or publicly report its allocations at the school level based on student characteristics. As a result, education stakeholders and policymakers cannot easily determine if the new LCFF revenue, which the California Legislature intended to help high-needs students, is boosting spending in the schools these students attend. As Marguerite Roza noted in a recent report evaluating California’s LCFF revenue, “this lack of financial transparency makes it difficult to assess the degree to which LCFF is delivering—or not delivering—on the state’s pledge to drive resources to the highest-need students.” A more transparent student-based system would allow district leaders to track these dollars and make more informed decisions about how best to use the district’s scarce resources to improve student outcomes.

Student-based budgeting has helped other districts determine which schools should be closed or consolidated and which schools should be expanded or replicated. For example, after adopting student-based budgeting, the Denver school board approved the closing of eight schools that were under-enrolled and low-performing. The board projected that the realignment of students from these schools to higher performing schools would achieve projected yearly operating savings of $3.5 million. Those resources were used to improve the education of students who were affected by the school closures, delivering additional resources to under-performing schools, and creating funding opportunities for new schools and new programs. In addition to the standard per-pupil revenue that followed students to their new schools, the district reinvested $2 million, or 60 percent of the savings from school closures, into the schools of reassignment. In this way, a student-based budgeting funding system is an important modern financial tool that can help right-size LAUSD’s financial ship.

Full Study: A 2018 Evaluation of LAUSD’s Fiscal Outlook: Revisiting the Findings of the 2015 Independent Financial Review Panel

Infographic: LAUSD’s Financial Outlook

Lisa Snell is the director of education and child welfare at Reason Foundation, a nonprofit think tank advancing free minds and free markets.

Aaron Garth Smith is an education policy analyst at Reason Foundation, a nonprofit think tank advancing free minds and free markets.

Tyler Koteskey is an education policy analyst at Reason Foundation, a non-profit think tank advancing free minds and free markets.

Marc Joffe

Marc Joffe is a senior policy analyst at Reason Foundation.

Truong Bui is a policy analyst at Reason Foundation, where he works on the Pension Integrity Project.