Staying solvent: as more and more districts face serious financial problems, it is important to understand how the decisions school leaders make every day have lasting economic impacts on their districts, and to recognize the signs that may predict failure

Leadership, May-June, 2004 by Ron Bennett, Joel Montero, John Gray

More and more school districts each year are facing financial challenges for myriad reasons. One of the most pervasive among these reasons is the condition of California's economy; school agency fortunes must inevitably rise and fall in tandem with those of the state. Add to this the economic realities of the state budget, low cost-of-living increases and increased costs for maintaining the status quo for programs, and we believe that a large number of districts will face serious financial problems and, without effective and informed leadership, the possibility of fiscal insolvency.

The number of qualified and negative certification districts has grown substantially in recent years and will likely double during 2003-04. A qualified certification means a district may not be able to meet its economic commitments for the current and two following years; at the time of certification of the 2002-03 Second Interim Report, 56 districts were qualified. A negative certification means a district will not be able to meet its obligations for the current and one additional year; the 2002-03 Second Interim certifications showed that eight districts were negative. If a district submits a positive certification, the county superintendent has responsibility for review and must lower the certification if it is not supported by the financial data.

Although district finances are heavily dependent upon the statewide economy, many financial failures are caused by factors unrelated to the fiscal health of the state of California and are predictable well in advance of the actual failure. School boards, superintendents and other staff members make decisions every day that have lasting economic impacts on the district. We will discuss some of these conditions and, more importantly, how to avoid them.

Indicators of emerging problems

Over a period of many years, a collection of indicators has emerged that are common in districts experiencing financial distress. No single district experiences all of the indicators simultaneously; however, some collection of the following list of problems routinely exist in troubled districts. FCMAT offers the following list of problem indicators on its Web site, www.fcmat.org:

* Poor leadership

* Ineffective communications

* Flawed budget development processes

* Lax budget monitoring processes

* Lack of controls on positions

* Inaccurate management information systems

* Lax monitoring of categorical programs

* Pay raises over COLA

* Poor management of long-term debts

* Personal and professional attacks

* Exits by staff and students

* Lawsuits

* Employee group unrest

* Community misperceptions

We believe comparison to this list provides a very accurate first impression of the general condition of the district. It should be noted that many of these factors are not financial indicators per se, but lawsuits, personal attacks and employee turnover provide a breeding ground for problems that will sooner or later find their way to the financial statements.

For characteristics of districts that are failing financially, see box above.

Characteristics of successful districts

Another way to assess the propensity for financial problems is to look at four fundamental areas that well-managed districts get right. We think the organization can be analyzed by looking at leadership, people, systems and resources. They are presented in order of importance below.

** Leadership

Leadership is the first and most important element of organizational financial success. The leadership qualities found in failing districts are often very different than those in successful districts and may aid in the eventual demise of fiscal health. In successful districts, the leadership team sets standards that define what is acceptable within the organization and those standards become part of the culture of the district. Standards become well known and are self-policed by everyone in the organization.

Well-led districts also engage in strategic planning, which results in a road map to guide both operational and financial decisions. Good, acculturated standards and well-laid plans provide well-led districts with a continuity of purpose that is often lacking in troubled districts.

Finally, integrity and ethics are valued in every aspect of district operations. People are rewarded for identifying problems early and reporting them while they are still manageable. They do not fear breaking bad news to district leaders and are not tempted to cover up or avoid problems.

** People

Competent people are the heart and soul of any organization. Competent employees with integrity, energy, enthusiasm and motivation are a must to ensure the fiscal health of a district. Financially failing districts often lack these employees or do not listen to them. In order to have competent employees, districts must create a shared vision and a sense of purpose in each and every employee. School districts should have only two kinds of people: teachers, and people who support teaching. Staff development is essential to ensure all employees are engaged in a meaningful way with the fundamental mission of the district.