Board member Rosie Loeffler-Kemp, in her endless quest to wring happy talk out of every boardroom situation, asked the auditor who just reviewed ISD 709’s books, if it was a good audit.  “Thank you for reaffirming that!” The soon-to-be senior-most board member and domineering presence of the boardroom happily replied, when the auditor agreed that it was. Some of us laughed together afterwards that it indeed was a very good audit, that accurately laid out a bad situation. 

School Board Business Committee meeting, 12/11/17

To give credit where credit is due, let me first focus on the bright spots in the audit report. No noncompliance with regulations around federal programs or Minnesota statutes was uncovered. No problems with internal controls was discovered. 
The second point is very important, because it shows improvement over past years. Presumably, in part due to the upheaval of the Red Plan, the auditing firm has, in the past, reported “material weakness in internal control over financial reporting” in the district’s Financial Statement findings. In fiscal year ’10, for example, the auditor stated: “As a result of audit procedures, we identified certain errors in calculations and estimates. The district posted to its general ledger accounts certain adjustments to correct these errors. These adjustments resulted in an increase in revenues of $516,086 and a reduction of expenditures of $38,538. The adjustments were material to the district’s financial statements.” 

The year before, in ’09, additional revenues were recorded in the amount of nearly a million dollars ($914,296). In ‘13, revenue was increased by $717,291 and expenditures reduced by $225,973, a swing of nearly another million. More than once the auditor certified that “the district does not disagree with the findings” and stated district 709 would put a corrective action plan in place and that “the school board will monitor the district’s compliance with the corrective action plan.” 

The chief flaw in this corrective plan has always been that most members of our school board, judging by performance, would have trouble monitoring the revenues and expenditures around a PTA cookie sale. Apparently, however, district administrators have managed to self-guide themselves into a better performance grade for the accuracy of their numbers. 

“Everything that you’re doing--that we looked at —seemed to be working well.” The auditor told the Board, as she gave the district a passing grade for “the control processes over your transactions and the preparation of the financial statement.” She also stated that “there were no (negative) findings for the federal programs--that’s extremely important--and no (negative) findings for the compliance of Minnesota statutes. The caveat is,” she added, “we don’t look at everything. And so there could be significant deficiencies or material weaknesses that we did not identify.”

In other words, the passing grade may have been a matter of sheer luck. Some people think an audit always involves an examination of every line in an organization’s ledger, but this is seldom true. Most audits are a sampling. Given the fiscal distress of ISD 709, a thorough, line-by-line examination likely would uncover something significant. 

Still, we should take the rare opportunity we’ve been handed and join in with member Loeffler-Kemp’s happiness. School district 709 did pass this part of the test, so let’s all give our usually low-achieving, struggling student a round of applause! 

But — you knew it: the bad news.

It’s been widely reported in the mainstream media that the district’s finances are crashing. For the first time in all the years I’ve witnessed this fiscal train wreck, district 709 officially finished out last year in the red, with a general fund reserve fund unassigned balance of negative $485,864.

As I’ve reported previously in this column, the last really close call came in 2013. That year, the district changed a severance insurance fund from assigned to unassigned status to dodge the bullet. Once the fund was unassigned, that money could flow into the rest of the unassigned part of the general fund and lift the budget out of negative territory, though not by much. 

The reserve balance was $30,151,202 at the end of fiscal year 2005, when Keith Dixon first arrived on the scene to save our public school district. In 2013, the balance dropped to $781,808. 
“From the point of view of an audit,” the spokesperson for the auditing firm informed the Board during this meeting, “you cannot have an assigned (fund) that creates a negative unassigned (reserve.) We have had years where we have not been able to assign for ‘severance,’ because it would have created a negative.” 

Even with the severance insurance fund still unassigned, the district has now slipped into the red. 
I was in the boardroom when the manipulation of the insurance fund first occurred. The former Finance Manager stood up and apologized to the Board for “forgetting” to have them assign the fund. I frankly don’t think it would be possible to get a more bewildered, uncomprehending row of expressions by making a loud noise in front of a primate exhibit at the zoo. In the book I’m writing — a book that may one day cause some consternation among this town’s leaders — I wrote: 

“Member Johnston, myself, the Superintendent and district finance administrators were the only people in the city who knew what was going on or how close things had come. No mainstream reporter in the boardroom picked up on what was happening; none of the other Board members had a clue, either, and still don’t. I found the situation astonishing, almost inconceivable. Six out of seven members of the public’s representative body — the elected group responsible for fiscal control —had no idea the district was on the cusp of a financial breakdown.” 

The denial that started with Dixon runs deep to this day, but even the The Duluth News Tribune couldn’t couch the current bad news too much: “An independent audit presented to the Duluth School Board Monday showed that the district has no reserved unrestricted cash, and, in fact, is about $486,000 in the red. The Minnesota Dept of Education will step in if that deficit reaches 2.5% of annual expenses, or about $2 million in Duluth’s (basket) case.” 

Those of us who tried to point out the reality of the school district’s tanking budget during the last campaign are still healing from the beating we took. We were maligned and attacked by the silly paper, the even sillier DFL happy talkers and the we-just-want-ours-and-don’t-give-a-damn-about-the-big-picture unions as the “doomsday trumpeters.” Well, let the trumpets blow across our city again: our school district is BROKE and the situation is SERIOUS.

The Board hashes it over

One thing our Superintendent and his DFL Board minions are quite expert at is making excuses. Consider this quote from Judy Seliga-Punkyo, one of the sharpest operators to ever grace the boardroom of ISD 709: 
“We are in the best shape we’ve ever been in because we finally have stability. We have the programs we want, we have the plan, even financially we’re doing great. We have the best bond rating, we’ve had great audits. Honestly, financially we are doing great, if only the State would give us the money they’re supposed to.”

A few years back Judy and her allies, including Superintendent G., kept pointing at the payment shift from the State as the root of all their problems. They bashed the fact that some aid money was being deferred--held back for a few months--every year, as the only malignancy destroying all their otherwise excellent efforts at proper financial management. 

It was all nonsense, of course. Interest on the money ISD 709 had to borrow until the payments came in, and investment income lost from not receiving all the money up front, together added up to about $250,000 a year--a hit, but not one a healthy district with a reserve couldn’t have handled easily. All the State deferred money has been paid back for three years now, and it hasn’t made any tangible difference at all with the district’s money problems. 

The district again has a list of excuses in this round of the train wreck. One is a claim that the State formula for payment of special ed money to private and charter schools was altered last year, forcing ISD 709 to pay out $1.2 million more than it anticipated. 
A lot of whining went on during this meeting, as the DFLers and Superintendent Gronseth meted out some verbal abuse to their favorite whipping boy of all: Edison Charter. 
The anti-Edison campaign started in earnest two years ago, after the charter school organization audaciously offered to buy the Central school property. At the time, the Queen of Boardroom Excuses, Seliga-Punkyo, really got her lather up. She bashed the organization for allegedly being able to afford a better special ed program than ISD 709, while the school district was forced to pick up the bill: “Edison can go one-on-one with (special education students and) paras. The problem is the Duluth schools pay for that. And that has been frustrating for me to know, because that runs over a million dollars. In fact, a few years ago it was $1.8 million…that’s a lot of teachers that ISD 709 could provide…” 

The same domineering leader who carved huge aquatic centers out of the Red Plan was again swimming a bit outside the lanes. As Edison’s Head of School responded at time, in a letter addressed to the school board: “It would cost ISD 709 the same —even more —to provide these services themselves.” According to records from that year (fiscal 2015,) ISD 709 paid Edison Charter $1,569,109.07, about 58% of the $2,690,177.79 Edison paid out of its budget for the services it provided.

In a document shared with its school staff and families after this latest round of recrimation, Edison states categorically: “we are not the cause of any direct financial or budgetary issues experienced by ISD 709.” The document rebuts several of ISD 709’s insinuations that the charter school is somehow at fault, including the district’s claim that the change in the special ed formula came out of the blue, with no warning: 

“All districts were made aware by the Minnesota Department of Education of a funding formula change that would impact them related to special education in subsequent years and encouraged to plan for this. MDE shared the change in the special ed funding formula through memos, webinars (live web-based video conferences,) and MDE special education director forums. Knowing that something was going to change since 2014 does not seem (to us, your whipping boy, as) ‘unexpected.’”

“It concerns me when I hear the charter schools being blamed for this (our depleted reserve,)” Board member Johnston declared during the Business Committee meeting, “We are saying that, if we had these (special ed) students, we would be spending less money…While we may think that they (charter schools) may be giving these students too much, I think it’s really hard for us to make that claim, since we’re not there (in those schools.) We are blaming, again, these special ed services, and I think that’s really unfair.” 

“I’m having a hard time understanding how it’s $1.2 million.” Board member Oswald added. “It’s really hard for me to see where (it) adds up…Maybe you could baby step--walk me through — how it got to be $1.2 million.”
“I’d really have to — I, I want to do that,” Superintendent Gronseth responded, “when I have the documents in front of me and I’m able to refer to them. We do have those, and I could go over those with you. When we first started looking at this, I, too, thought: how can this be?”

Can it BE? Can it really BE, Mr. G.? 

The reserve, which was $2,359,436 at the start of last year, tanked to nearly half a million dollars in the red. Besides pointing a finger at special education, the district is also blaming that depletion on a levy adjustment for an elementary reading curriculum and a big loss of money due to enrollment once again dropping lower than projected. 

“This year,” member Welty said, questioning this last point, “using ADM figures, I came up with 60 fewer kids.” Multiplying that with “the $12,300 per kid, I calculated that at about $740,000,” which, he added, “doesn’t account for the entire $3 million deficiency in revenues.” 
“Member Welty, I think you missed a section of our conversation,” the Superintendent retorted, referring to the fact that member Johnston had just asked a similar question.
“That was what member Johnston just asked —” Business Chair Harala chimed in, 
“and then you re-asked.” 
“I think that question was legitimate from Mr. Welty,” member Johnston countered. “Looking at the numbers: they don’t quite jive.” 
At one point, as the meeting progressed, Harala snipped under her breath that some Board members “should put their listening ears on.” 
Harala also ventured a query of her own: “I have a question, before any other Board members start asking questions again. It’s kind of a--it’s a four-part question in one, that--aaaaaaah —so I keep thinking about--you know, there are some--I’m just gonna ask them: so what can we control, with where we’re at? And what can we do about what we can control? What can’t we control with how this budget happened, and what can we do about that? I just--we need--what--this is not a good state for us to be in. And what’s the plan for moving forward? So I’d just — I’d like to hear from administration on that —”

Expressing what everyone else in the room was thinking, Mr. G. replied: “I’m not sure I followed your four-part question, but I think I know where you’re headed.” 
Over the past four years, whenever our current Chair of the Business Committee has asked a finance-related question, I’ve found myself fumbling with my listening ears, wondering how in the hell I can bring myself some relief by taking them OFF. 
One of the most aggressive happy-talkers in the boardroom did manage to state something frankly and honestly for a change, however: this is not a good state for us to be in. 
“We are putting a plan in place to correct our current direction.” Mr. G. assured the room. “We have plans to make a plan for fiscal stability.” 
Already projecting another budget deficit for next year, the district has to make an immediate mid-year cut of $2 million to avoid slipping into statutory debt by the end of this year. After the meeting, administration floated a memo with a long list of proposed cuts and a request for every employee to voluntarily take two days of unpaid leave during the upcoming semester--a move the teachers’ union is already fighting. 

Despite official excuses, this mess is largely a self-inflicted catastrophe put in motion by the cotton-topped hustler called Dixon. 
Board member Loeffler-Kemp was pleased, however, to hear from the auditor that the audit itself had gone very well: “I know that you’ve shared that (good news) in the past (with previous audits,) as well as the great work of our staff in helping you. So, thank you, again!” 
Applaud, Duluth! It was a very good audit. What a pity it revealed a fiscal situation that sucks really bad.