Ep. 53: Fiscal Issues in LA Unified with Lisa Snell

Marty Lueken:  Welcome to another episode of EdChoice Chats. I’m Marty Lueken and the director of fiscal policy and analysis here at EdChoice, and I’m here with Lisa Snell, the director of education at the Reason Foundation and coauthor of a report which evaluates the fiscal outlook of the Los Angeles Unified School District. So Lisa, welcome to the program and thank you for joining.

Lisa Snell: Well hi Marty. Thanks so much for having me. I appreciate it.

Marty Lueken: Let’s begin by telling our listeners about your role at Reason and the work that you do.

Lisa Snell: Well I have been the education director at the Reason Foundation for many, many years now. I’ve been working at Reason since about 1994. We do both journalism, Reason TV, and education research, and primarily on school finance and also how school finance intersects with school choice, and how you really need the funding to follow the kids in order to have robust school choice programs.

Marty Lueken: That’s great. Certainly tackling a lot of interesting and important issues there, and it’s nice that we have a little overlap. Now before we dive into your report, and talk about LA Unified, can you tell us about California’s fiscal health overall, and about which localities, if there are any, that are struggling today with their finances? Of course other states across the country are facing these challenges of their own, but yeah, let’s talk about California.

Lisa Snell: So, I mean in California it’s an interesting phenomenon that’s happened there because in California we have a constitutional guarantee called Proposition 98 that basically guarantees that 50 percent of every new tax dollar that comes into the state goes to schools through the general fund.

In 2011, we had the biggest budget crisis, it was at an all-time high, and schools actually did, we have this constitutional guarantee, and what happens in California is if you can’t meet that guarantee, then basically you have a huge IOU to schools from the general fund and it compounds, right, over time. So that schools can actually, on the books, be owed billions of dollars by the state. So what happens here, right, is the legislature actually has no discretion how to fund schools.

So it’s a really bad way to design school funding, and I wouldn’t recommend that you put actual dollar amounts and guarantees into your state’s constitution, because then when you do have a fiscal crisis, it makes it really difficult for the state to deal with that.

Fast forward to Governor Jerry Brown in 2013, and he changed our school finance system in a positive way to basically weight money. And we used to have over 100 programs that were kind of one-off categorical programs, where one third of state funding went to these programs with their bureaucracy. So it could be anything from like school violence programs to stop school violence, class size reduction, teacher training, after school programs, athletic programs, but they were all ways that the state were funding from the state level these individual programs.

So the governor got rid of all of that and put everything into a straightforward formula where you had base funding, and then basically you get extra money for low-income kids, foster care students, and English language learners. It’s the same everywhere in the state, and it’s the same for charter school students. Now everyone follows the same formula so it’s easier to understand.

At the same time, the governor has tried to make up all this money that is owed to schools. So our fiscal health has been a little bit better in the last few years in California, and yet the state is in a deficit spending situation and so are the schools because of this constitutional guarantee that says money has to go to schools. But where we face similar things to other states and other districts is that our school districts inherently have a lot of debt.

So they have pension debt, right, where they’ve over promised their pensions. Then the pensions haven’t performed, and over time they’ve accrued billions of dollars in debt. They have retiree benefit debt, where they’ve accrued promises for healthcare and retiree benefits, but they haven’t funded them into the future, so they’ve paid on a pay as you go, and they accrue literally LA Unified billions of dollars in debt, and then they just also have lost students because of demographics.

So a lot of different districts, either because of demographic shifts, or because of lower birth rates, and many people moving out of California, they don’t have the students to support the school districts anymore, and so they haven’t done a significant amount of right sizing. You see this right across the country in lots of different places from Denver, to Detroit, to Washington DC.

If you lose students for various reasons, you can’t keep funding your staffing and all the things you promised schools at the same level. So in California we’ve been very bad at doing that, especially LA Unified. But it’s been interesting because in the last few years, because we have this tax increase that supports schools called Proposition 30, schools have actually had a windfall compared to 2011. So they’ve been on five years since 2013 of increasing revenue at the school level, and yet, most of the urban larger districts in California are in kind of a fiscal decline.

Marty Lueken: So why look at LA Unified? You mentioned that there is this report from 2015 by the independent financial review panel, why don’t you tell us about what that panel found?

Lisa Snell: In 2015, so LA Unified has been having fiscal issues for a long time. Let’s just start it with going to the basic reason for that. I mean, the reason to look at LA Unified is California itself has more school children than anywhere else in the country, and then LA Unified is the second largest school district in the nation, and at its peak in 2003, it had over 800,000 students.

So as goes California, as goes LA Unified, as goes the nation in some ways because the issues that it faces, and the large number of kids we have are not unique to us. LA Unified has lost over 245,000 students since 2003. In 2015, this panel basically said you have all of this debt, you’re at a fiscal cliff, and you don’t have the revenue coming in from students to support your spending. I mean that’s the bottom line is that LA Unified has had somewhat of a staffing surge, and they just spend more at the end of the day than they take in.

Of course, there’s big cost drivers like pensions, and these healthcare benefits, and you know, they over identify for special education, and they spend a lot on that, but they also just have more staff than they had when they had 245,000 more students. At the end of the day, that’s super unsustainable, right? You can’t spend more money, and at the same time that they lost all these students, they opened 135 new schools and they spent 20 billion dollars in bond funds on new schools.

The largest building program in the country, so you know, they’re like a very amplified example of how I think school districts do business, right? They don’t pay attention to whether they can sustain the obligations. They don’t connect up their staffing and spending, so I know as a report put out by EdChoice and your Staffing Surge report, you’ve documented, right, this happening all over the country?

Marty Lueken: That’s right. Has anything happened since 2015 or since this report by this panel? Why another look?

Lisa Snell: So what has happened is the 2015 report, called the Cortines report, or it was basically the superintendent at the time was Ramon Cortines, and this report was like a panel of experts, so they got all kinds of school finance experts, and people from the business community, and education experts from universities in California. They had all these prominent people look over the finances, and they made these predictions that basically LA Unified would be bankrupt, and they would have to do this massive layoff, and the reason that we are taking another look at it is because to a certain extent, those negative effects that they found, were buffered by this sudden influx of money.

So at the time the report came out, it was kind of contemporaneous with the governor changing the funding formula, and LA Unified, and I hadn’t made this clear before, because of the way the governor changed the formula that you would get 20 percent more for each low income kid. And if you had a concentration of low income kids you would get 50 percent more for a certain number of kids in high poverty categories. It basically led to a huge windfall for LA Unified, where they actually for several years, got over a billion dollars a year extra just for these kids.

It could’ve been a time that they could have used some of those extra resources to pay down some of their debt. They could’ve strategically, right, not hired new folks as people retired, but instead they used the money district wide to restaff up. So instead of taking seriously this report, they said, “Oh, well we have this extra money, and because this debt is in the future at some point, we’ll hire more librarians, psychologists, and teachers.” So they had another mini staffing surge after 2015 while they still couldn’t meet these long-term financial obligations.

Every year, while they were hiring more people, every year they still had to do all of this jockeying around because of fiscal deficits. And so what they saw is they had a reserve level, which means was kind of like their savings, and now it’s shrunk so that those reserves are gone. So our report kind of documents that spending, and that increase, and how that new surge of revenue … The other thing that we find in our report is that revenue was supposed to help low income kids in a strategic way, and the district actually hasn’t done that. They’ve gotten all this money that was weighted for disadvantaged students, and then they’ve just used it for district-wide spending.

Marty Lueken: But at the time, what was enrollment like? Was enrollment also going up as well?

Lisa Snell: So right, so this whole time since 2003 LA Unified has never had an increase in revenue, and every year since 2003 they’ve lost between 10,000 and 50,000 students. So this last year, they’ve lost about 18,000 students in 2018. Or in the most current academic year, 2017-2018. And they have enrollment declines, you know, it’s kind of a science to try to predict, you know, birth rates, and how many kids there will be in LA county. And all indicators indicate that this will keep declining. I think this is where, you know, an angle that is interesting comes into play, part of those kids went to charter schools.

So the narrative from the district is not, “Oh, we have a staffing surge. We have pension debt. We just signed a new three year contract where we didn’t reduce our healthcare spending for retirees, like a week ago,” and so those obligations go up instead of down. It’s not because of these decisions we’ve made, it’s because families went to charter schools. That’s why we don’t have any money. They want people to believe that the charter schools and the decisions that families make to go to higher quality schools when they make choices in LA are somehow responsible for their fiscal deficit.

Marty Lueken: So why would charter schools be the reason for that, and is that a valid accusation?

Lisa Snell: I mean, it is true that when students leave for charter schools in Los Angeles, they are part of the district, and they are authorized by the district, and they are public schools, and the parents have thought that that’s a higher quality choice, but it does mean that the district itself for each child that leaves, no longer has that state revenue. So immediately they don’t have certain costs for educating those kids, and over the long term, right, they do have some fixed costs, but the district exaggerates what those are.

Marty Lueken: Sure.

Lisa Snell: But we can see from both the 2015 report and from our report that they’ve literally done nothing to adjust, right, to lower those fixed costs, then they’ve done the opposite. So when you look at their per pupil teacher ratios, or their per pupil administrator ratios, those have all gone way down so they have way fewer students per teacher, but what is ironic about it and this is kind of nuanced and complicated is that at the school level, because they added all these 135 new schools, they have a bunch of schools that are at not at capacity, so meaning that, you know, if they have 1,500 seats for middle schoolers, they might only have 500 students.

Marty Lueken: Right.

Lisa Snell: So they’re fully staffing all of those schools, and so from a parents perspective, or a principal’s perspective, it still might feel like you’re short teachers and workers. So district wide we’ve had a staffing surge, but acutely at individual schools because they’re spread so thin with too few students and too many schools, it could still feel like things are crowded, or you don’t have a secretary, or front office person, or a librarian because they haven’t done anything to consolidate, or right size in the way, you know, that a regular business would be forced to.

If Starbucks doesn’t have customers, and they have too many stores close together, you know a couple years ago I think they closed like 5,000 Starbucks stores nationwide or something because their infrastructure couldn’t support it.

Marty Lueken: So what’s the reluctance for consolidating and getting their finances together?

Lisa Snell: I mean, first, you know it’s like a lot of people that have spending problems within an individual family, they don’t release a lot of information about it. So the whole thing about all these under enrolled schools, every year they have a capacity report called the ECAR, and you can’t find that anywhere online. They don’t publish the numbers, and it’s kind of like a dirty little secret that they don’t have enough students to support the number of schools that they have open.

I think so far they’re still in kind of a denial or blame game, just recently they’re looking for a new superintendent, and unfortunately for the superintendent that they had, she had to retire because of health reasons, but before that both school board members and school administrators would repeatedly say they’re understaffed. They’re overcrowded.

They’d make the opposite argument that they don’t have enough money, and that’s one of the reasons that we wanted to take a look at their finances. How much money are they spending per pupil? What kind of debt are they accruing? How much should charter schools be held accountable for that?

The thing is, first of all, if they were able to get every charter school student back, you know, it’s a structural deficit so even if they increased enrollment, those costs would go up as they had to hire teachers, and it wouldn’t do anything to change the disproportionate amount of money going to healthcare, pensions, special education. It would just multiply that phenomenon.

So even if they got all those kids back from charter schools, I mean it’s just a lack of transparency, and it’s a lack of information in the public to know what’s really going on. I mean I guess it’s just like a lot of organizations, government organizations, they’re not keen to shrink themselves.

So it looks like they are about to bottom out, that they actually won’t have reserves. So this whole state scenario I described is now the governor has 100 percent funded this new funding program, and all the new revenues and windfalls that they received over this last five years have come to an end. They don’t have new revenue coming in because of the change in the formula, and they don’t have reserves left. So I guess this will be the true test, what will they do without new revenue with the loss of students, and without reserves to support them anymore?

Marty Lueken: For our listeners, what does the situation look like? Can you share some numbers to help paint a picture of how stark this situation is?

Lisa Snell: Yes. I mean overall, the district is looking at 500 million dollar budget deficit for 2019.

Marty Lueken: Wow.

Lisa Snell: That increases to a multi billion dollar deficit in the out years.

Marty Lueken: Wow.

Lisa Snell: On the books, they have five billion dollars negative on their audited financial statements, and that’s because of their long term financial debt, but of that, part of that is misleading. It’s worse than that because against their debt, right, is five billion dollars in real estate assets that is not liquid, so really they have 10 billion dollars negative.

Marty Lueken: Wow.

Lisa Snell: But when you look at a financial statement, the assets go against that, but it’s not like they can, while yes, they probably could sell some real estate and there’s probably some strategic thing they could do. In Los Angeles, real estate’s valuable. If they had a plan to consolidate schools, and to sell of real estate, they probably could deal with their deficit in some way. But the point is that five billion that’s going against that 10 billion dollars in negative, basically revenue or debt on their audited financial statements is real estate. There’s schools on them, and there’s kids attending those schools right now. So basically I guess the other way to look at this is then how much does this long-term debt encroach on your current operating money?

What I mean by that is in school districts, the main budget is called the general fund, and that’s basically all the revenue you receive every year, from local funding, state funding, and federal funding to operate your schools. That general fund pays everything from textbooks for that year, and instructional spending, to all the salaries of all the employees in the districts from central administrators, to all the people that work in schools. Principals, and teachers, and custodians, and staff. And so right now, it’s projected that in 2020, almost 60% of the revenue, the general fund revenue, the new revenue they receive in 2020 by pay-as-you-go pension debt, paying for healthcare benefits and retiree benefits, and paying for special education.

So 60 percent of their funding would go to those three categories of their current revenue before they spend $1 to operate schools.

Marty Lueken: Wow.

Lisa Snell: Now I realize that special education is going towards some students in schools, but still, that’s a lot of their general fund revenue. This is a phenomenon across the country, right? I mean we saw recently where Detroit, at one point a couple years ago, before they reconfigured basically, how the state bailed out Detroit, 100% of their current revenue was going to pension funding. So I think this is why districts across the country, structurally, are really unsustainable financially.

Marty Lueken: Right.

Lisa Snell: Because all of this long-term debt and obligation encroaches to a greater and greater percent. So when teachers, you know, say there’s no money to pay teachers, they should actually be fairly angry at their unions because in places like California where we’re at about $16,000 per student, if you had 20 students, that’s $160,000 per 10 students. 200, 300, you know close to $350,000 and the teacher salary is maybe $80 on the high end.

Marty Lueken: Wow.

Lisa Snell: So that means that a ton of money is going to support a structure, and not going to teachers at all, you know, the number one thing. So when teachers say they’re underpaid, I don’t think that’s true at all. But when you put that in the context though of the 700 billion dollars we’re spending on K–12 education, teachers aren’t getting a very big portion of this. A lot of it is going to these kind of long-term bad decisions that people made and to debt.

Marty Lueken: Wow. Do you think that there’s a role for private school choice to be part of the solution set for Los Angeles Unified’s challenges? I mean on one hand, with how we typically fund K–12 schools today, we’ve built up a system where not all the dollars follow the students, right?

So when a student leaves, it’s usually the local funds and some portion of the federal funds because they’re not directly tied to enrollment, they will remain in the district when the district loses students. So what that means is that when students leave a district, the amount of resources that district has for each of the remaining fewer students goes up, which would be a benefit. Of course, if you have an influx of students then the reverse happens, right?

Then you have fewer resources per student. So what are your thoughts, both in general and from a fiscal perspective, about private school choice programs like an education savings account program, for example. Could they play some kind of role?

Lisa Snell: Well, I mean absolutely. I mean this whole kind of structural way that we do schools, in some ways it’s kind of used as an argument to hold everyone hostage. That because we’ve done this now forever, you know, I mean it’s this whole pension debt, and this healthcare obligations, and the capital debt the districts have, all these different things.

They didn’t happen overnight, but in some ways they’re an argument for reducing school choice from the establishment’s perspective. You know, they’ll say, “We can’t have school choice because they don’t participate in these legacy debt programs.” So in some ways we need up upend this, because we’ve made these bad decisions in the past, does that mean that this is how we’re always going to fund schools in the United States forever?

On this deficit debt model where the money doesn’t actually go to the students, and we just keep paying things off? I mean at some point, government bankruptcy, or state laws that change, you know, contracts for pensions and healthcare, or districts themselves.

You know, like in California, Oakland Unified, which is in a similar fiscal debt, they just said, “Well, we can’t pay our retiree benefits so we’re not going to, and we’re not going to do it anymore.” So now they don’t offer those retiree benefits anymore, but there’s lots of interim things between those two drastic extremes where you could make people share costs, but what we really need though is a completely different way of funding schools that support school choice that’s completely agnostic to whether it’s a government run school through a school district, or a charter school, a public school, or a private school choice, that the money is completely attached to the student.

Lisa Snell: You know, if we think of higher education as a model, and it’s not perfect, and there’s things wrong with that, but when you have private pay and you have state subsidies, and you have Pell grant, all of that is completely 100 percent attached to the student. In some combination, and in some cases it is families paying 100 percent of their college tuition. But a large majority of students get some kind of subsidy from the feds, or from the state, or loans, but the bottom line is the distribution of those dollars are completely agnostic, and they’re available to the student to spend at any institution. But I think in school choice 2.0 or whatever we’re calling it now, school choice 400, we’re going to go much farther than that with our education savings account, right?

But it’s not attached to an institution like higher ed, and this is where it differs from like a Pell grant model. It’s attached funding to an actual family and they can make decisions about whether they want to go to multiple, you know take some classes online from Stanford to online high school, and then go to some kind of a sports program, and then use money for a tutor, or for therapy if their kids need some kind of speech therapy because of learning disorders. Whatever it might be, right? They would be able to use a combination of that revenue and it would be completely neutral to institutions, and it wouldn’t support legacy debt.

So to the extent, I mean, we’re far, far from that kind of distribution mechanism for K–12. Right now it still is attached to geographic regions, and school districts, and residential assignment, and it’s filled with inequity, and it’s much more complicated than how we fund preschool, or higher ed, where in most cases it does follow the student, but that’s where the role of ESA’s and school choice is, is that we can’t hold everyone hostage to the fact that LA Unified has a lot of debt, and so therefore charter school students, or every student in the state somehow has to share in that debt forever, and we’ll just keep dumping more money into these kind of negative legacies.

I think ESAs, it is the wave of the future. It’s just getting the political difficulty of changing funding so that somehow we get out from under what school districts have been doing for decades.

Marty Lueken: Before we wrap up, what would you like our listeners to take away from your report?

Lisa Snell: I mean I guess the bottom line is that until more families, and we have more families, and policy makers, tax payers, just the public in general, and then I would say policy makers in terms of legislators, you know they need to realize how severe and stark, like they have legislative intent to spend more money, say in California on English language learners, or foster care students, or students who live in poverty. And they’ve appropriated billions of dollars at the state level to spend on these students. In that legislation when Jerry Brown, for example, made those changes, nowhere did he say, “No, this will help districts back fill their retiree benefits.”

He specifically wanted to fund students, and yet this distribution or mechanism that we have where money goes to districts, it really does the opposite of that but people don’t realize that because we still say, “Oh, $16,000 per pupil is going to California students.” But in reality it’s not actually even going to the schools where they attend. It’s not going to the students in any way.

So that’s kind of a takeaway is the first step moving to school choice is to have more transparency about just how much debt districts have, and how that means that the students that they serve actually don’t get the money. Because if you are going to spend taxpayer money on schools, at the very least you would think that that money would reach students in some way, and not all of these other kind of adult priorities that school districts have.

Marty Lueken: Well, California certainly has its work cut out for it.

Lisa Snell: As does the nation.

Marty Lueken: You’re right. Right.

Lisa Snell: Although Indiana’s done a pretty good job in opening up some school choice avenues, and having the money follow the child. So I guess Indiana is the state to look at for positive change, even though they have a long way to go as well.

Marty Lueken: Right. Right. Yeah, Indiana did enact some reform in 2008 I believe, that some changes to their funding formula, so certainly more dollars follow students than before. Well, my guest today has been Lisa Snell. Lisa, it’s been a pleasure talking with you. Thank you very much for joining us today.

Lisa Snell: Well thanks so much Marty. I appreciate it. Talk to you again sometime.

Marty Lueken: I’d like to thank our listeners for joining us for another EdChoice Chat. Don’t forget to subscribe to our podcast for more of our coverage of school choice and educational choice research, policy discussions, and anything else we happen to talk about. Until next time, please take care and please visit us on our website at edchoice.org. Thank you, and enjoy the rest of your week.