THE VIRGINIAN-PILOT
Copyright (c) 1995, Landmark Communications, Inc.
DATE: Sunday, September 3, 1995 TAG: 9509010215
SECTION: VIRGINIA BEACH BEACON PAGE: 08 EDITION: FINAL
TYPE: Cover Story
SOURCE: This report was produced by staff writer KAREN WEINTRAUB.
LENGTH: Long : 235 lines
Last year, the Virginia Beach school district spent $7.4 million more than it had, violating a state law that says school budgets must balance at the end of every year. The magnitude of the problem was discovered only a little more than a week ago when the books for the 1994-95 school year were officially closed.
Last Monday, the School Board asked the City Council to bail it out. Council members said Monday that they intend to give the district what it needs, but not before a more complete accounting of what went wrong. The city staff, which helped the district realize it had a problem, is compiling a detailed analysis of the situation to present to the council Sept. 12.
The council is particularly concerned about the deficit because it reflects poorly on the city's financial health. People and companies that lend the city money express that concern by demanding more interest for their loans, therefore increasing the city's cost of borrowing money to build roads, schools and other projects.
If the council does not react quickly and effectively to ensure the school district's financial troubles are cleaned up, the city's financial advisers warned last Monday that those costs could rise.
How big is the problem?
The most obvious problem is that the district has $7.4 million less than it needs to pay its expenses for 1994-95. But larger problems also exist. In an effort to keep the deficit down, the district moved money from accounts set aside for things like textbooks and insurance. That means when it comes time to buy books, the school system might have to go back to council for more money.
The spending shortfall also points up serious problems in the way the district keeps its financial records. Basically, the district doesn't always know from one day to the next how much money it has. The system is using an 18-year-old accounting package to manage its $340 million annual operating budget. The superintendent regularly moved large chunks of money around after the year's budget had already been set. And apparently, no one in the top administration or on the School Board knew the district's true financial picture until last weekend when the city's staff finished its annual analysis.
How did this happen?
It's not entirely clear yet how the district got into this fiscal fix, but it appears to be a combination of factors ranging from overestimating federal funds to underestimating the cost of janitorial services. Some say the problems started in the early 1990s; others say they were taken completely by surprise.
The district's chief financial officer, Mordecai L. Smith, said the budget was in trouble from the beginning of the 1994-95 school year, because he was left with several million in unpaid bills and shifted funds from the year before. In December, Superintendent Sidney L. Faucette put the brakes on hiring and spending and warned the board there might be a deficit of $7.4 million by the fiscal year's end on June 30. In May, Faucette said the deficit could be as high as $12.4 million, but as of Aug. 18, Smith was predicting the district would overcome its financial troubles and post a small surplus for the year. Smith thought he could balance the budget by using unspent money in one fund to compensate for a shortfall in another. Smith said he only realized in the last two weeks that such a bookkeeping procedure would not work.
School officials insist the spending problems were limited to the top administration and did not reach down into the individual schools. Classroom funds will not be affected by the financial crunch, officials said.
Who are the players?
It's too early to assess blame, although there was a lot of finger pointing on Monday, mostly in the direction of Faucette, who left the district in June to take a job heading the Gwinnett County school district in Georgia. Later in the week, Faucette told an Atlanta newspaper that he was never told the seriousness of the situation.
City Council is involved because it provides more than half of the district's funds. The council can allocate the money in one lump sum or four broad categories, but it cannot tell the district how to spend it. City Finance Director Patricia A. Phillips uncovered the extent of the district's financial problems in her year-end analysis of the city's fiscal picture, completed last weekend. She and other city staff members, guided by the council, are now helping the district figure out what went wrong and devise solutions.
Council members were furious last week over the financial problems, which many had predicted. Mayor Meyera E. Oberndorf and Vice Mayor W.D. Will Sessoms Jr., in meetings with school officials over the last year, had repeatedly questioned the district's financial status and had been reassured that everything was under control.
The board and council are frequently at odds over financial matters. The school district, which has no taxing authority of its own, has often objected to council's interest in its internal affairs. During this year's budget process, the council and board traded barbs: Board members said the council didn't care about education, and council members said the board was not spending its money responsibly.
School Board member Ulysses V. Spiva said Monday that someone at the city should have caught the financial problems before they got out of control. Last year's budget projected that the schools would receive $4 million more from the federal government than they had ever before. That should have been a red flag to the city that something was wrong, Spiva said.
Board members said last week the deficit took them completely by surprise because school officials had been promising a surplus. ``We have serious egg on our faces as a board,'' member Joseph D. Taylor, a member of the budget committee, said at a public meeting Monday. ``A lot of this information here we should have been aware of two or three weeks ago. I'm just embarrassed.''
Interim superintendent James L. Pughsley said he also was in the dark about the fiscal troubles until late last month when the books were closed. The board and council praised Pughsley for dealing with the problems in a straightforward manner and for trying to come up with solutions to prevent them from ever happening again.
Pughsley came to the district in 1993 after a stint as superintendent in Monroe, La., and a long tenure in Clark County, Nev., which includes Las Vegas. He came to Virginia Beach as the deputy superintendent, the No. 2 post in the system, and spent most of his time dealing with administration at the district's 75 schools. The board chose him as interim superintendent several days after Faucette left, and Pughsley is now competing for the top job.
Other staff members who were involved in the budgeting process and/or who now have to pick up the pieces:
Hal W. Canary was the district's chief financial officer for about a year, from mid-1993 until August 1994 when he was suspended. No reason was ever given, but Canary was ``relieved from his duties'' soon thereafter. Canary, a financial consultant now living in Memphis, Tenn., was in charge of the district's books during 1993-94, when a several million dollar deficit was minimized by pushing payments off into the 1994-95 budget year. Canary said last week that the district was already in financial trouble when he arrived.
Sidney L. Faucette took over the top job in Virginia Beach's school system in July 1991, the fourth superintendent in four years. A dynamic and forceful man, Faucette was known more as an educator than an administrator. He was well-liked by the School Board, who repeatedly came to his defense as allegations of funding problems surfaced throughout the 1994-95 school year. Faucette initiated the projects - including the purchase of the old Commonwealth College building and the leasing of the Celebration Station building on Virginia Beach Boulevard - that are now blamed for creating the district's current crisis. He authorized or had to sign off on all money transfers in the budget and was responsible for suspending and then firing Canary.
Kevin A. Jones was the district's auditor from 1993 until he abruptly resigned in April. He never gave a reason for his departure, although School Board member Susan L. Creamer, an accountant who had pushed for the creation of his position, said he ran into trouble when he tried to make major changes quickly. The auditor, one of only two staff members who reports directly to the board and the superintendent, is supposed to monitor the system's bookkeeping, boost efficiency and ensure compliance with all laws and regulations. The board has not filled this position.
Donald A. Peccia, now associate superintendent for administration, has spent 26 years in the district and is well-known for his integrity. Pughsley promoted him from his post as director of personnel on Aug. 1. as part of a reorganization plan and an effort to add more fiscal responsibility. Peccia, who is now in charge of all financial, personnel and human relations departments, has a Ph.D. in education from Virginia Tech with an emphasis in school finance.
Mordecai L. Smith was promoted to acting chief financial officer a year ago when Canary was fired, but was only named to the post officially in February. His post makes him the closest person in the administration to the budget and the one most directly responsible for making the math come out right. Smith said he inherited a disastrous budget and did his best to minimize the damage this year. Smith said neither he, nor Canary (his predecessor), were to blame for the financial mess and that he did his best to minimize what could have been a $15 million deficit. He said he had warned the board throughout the year that the budget was in trouble, but that he thought he could work things out by year's end.
What is the law?
State law says that school districts must meet their annual budgets unless given permission ahead of time by the city council. Anyone who knowingly violates the law is guilty of ``malfeasance,'' a misdemeanor that carries a $250 fine. Apparently, no school district or officer in Virginia has ever been taken to court for blowing a budget.
On Aug. 25, Pughsley and the board hired Joseph L. Lyle Jr., an attorney with Kaufman & Canoles, to represent them in case legal action arises from the financial problems. The city attorney, Leslie L. Lilley, represents both the School Board and the City Council.
Lyle said he didn't think his clients could be held liable for the budget disaster, because they had no intent to violate the law. The board members relied on information given to them by the district's professional staff, he said.
Robert J. Humphrey's, the Commonwealth's Attorney, can order an investigation into the budget trouble. He would not return repeated phone calls this week to say whether he had any plans to do so.
What's next?
The financial problems should not be apparent at the individual schools as the new school year begins Tuesday.
The School Board has scheduled a special workshop on the 1994-95 budget for Tuesday afternoon from 4 to 6:30 p.m. in the board room. The board's regular monthly meeting will begin at 7 p.m. and will be aired live on cable television channel 47. Kids First, a parent-led school watchdog group, has pledged to attend the meeting to demand the resignation of the nine board members who have held their positions for more than a year.
The City Council, which will meet Tuesday beginning at 2 p.m., is expected to formally direct its auditors to take a hard look at the district's finances. The meeting also will be aired live on cable television channel 48. ILLUSTRATION: [Cover]
WHAT'S GOING ON HERE?
Staff photo by D. KEVIN ELLIOTT
Donald A. Peccia, associate superintendent for administration, left;
James L. Pughsley, interim superintendent of schools; and Mordecai
L. Smith, the school district's chief financial officer; answered
questions regarding the budget shortage before City Council last
Monday. A detailed analysis of the situation is to be presented to
council Sept. 12.
Among the people now out of the picture are former Superintendent
Sidney L. Faucette (left), who left the district in June to take a
job heading the Gwinnett County school district in Georgia; and Hal
W. Canary (above), the former district's chief financial officer,
who was ``relieved from his duties'' in August 1994. He is now
financial consultant in Memphis, Tenn.
Spiva
Creamer
``We have serious egg on our faces as a board. A lot of this
information here we should have been aware of two or three weeks
ago. I'm just embarrassed.''
Joseph D. Taylor, a member of the School Board's budget committee
INFOLINE
COMMENTS
What do you think should be done about the school system's budget
deficit? TOUCH 3328 (DEBT) and leave your thoughts. Responses will
be published in the Beacon Sept. 8.
DIAL 640-5555
TOUCH 3328 (DEBT) and leave your thoughts.
Responses will be published in the Beacon Sept. 8
Lilley
KEYWORDS: BUDGET VIRGINIA BEACH SCHOOL BOARD by CNB