Audit Gives School District Failing Grades

By Carol Dimmick

Picture dropping your teenager off at a local mall with an American Express gold card and you have a pretty good idea of what the accounting firm of Arthur Anderson found when its employees performed an audit on a major division of the San Francisco Unified School District recently.

Apparently all sense of prudent business practices went out the window, according to a preliminary report dated Feb. 9 on the Facilities Development and Management Department.

The department oversees millions of dollars of school bond money and is responsible for building and maintaining the district's 115 facilities.

The excoriating 157-page document, obtained by the Richmond Review, was commissioned by school's Superintendent Arlene Ackerman in November after a state-mandated audit last spring found irregularities in the department's contracting practices and was unable to reconcile millions of dollars in school bond money.

The scathing report describes the department functioning like a runaway locomotive with top management spending millions of dollars of school bond funds without a master plan.

When the well ran dry, according to the report, management simply transferred funds from one account to another to keep projects going, often using funds for unintended purposes of questionable value.

According to the report, management authorized the use of $27.2 million of $90 million of 1994 voter-approved school bond money to pay the department's salaries, overhead, benefits and to cover unauthorized cost overruns on construction projects.

The audit found the $27.2 million was spent to:

· Pay the salaries, benefits and overhead of the department without school board approval. Expenses of this kind are paid from the General Fund. The report warns that if the practice continues, salaries will have to be absorbed by another fund or large staff layoffs will occur if "voters fail to approve a new bond in 2002."

· Pay for cost overruns on construction projects not entitled to bond money, such as Tenderloin Elementary School, without board approval.

The report says the department avoided school board scrutiny by splitting up hundreds of contracts into amounts of $15,000 or less, the amount that would trigger a need for school board approval, and later approving multiple modifications with many contracts soaring into six figures.

Report Recommends Independent Audit of Accounts within 30 Days
While the report stops short of calling the misdeeds illegal, what the auditors found made them nervous enough to recommended that within 30 days the district "engage an independent party to audit facilities-related funds from 1996 forward to ensure compliance with fund appropriations."

The department was also unable to provide auditors with current fund balances, triggering a second recommendation that an independent party "reconcile all facilities-related fund balances within 30 days to determine available funds."

Deputy City Attorney David Campos, who advises the school district on legal matters, confirmed he is expecting a second report from Arthur Anderson on potential fraud issues involving the misuse of school bond money.

The report also suggests the City Attorney's office failed to provide adequate legal advice to the district on contracting matters and real estate transactions.

It recommended that the district sit down with its legal team and "review the legal requirements of managing and spending Proposition 39 bond funds."

It was also critical of the role the legal team played in advising the district on real estate transactions, saying it was "of concern that the City Attorney's office claims only a limited role in advising the district."

New Projects Out-Pace Funding by $153 Million
The report blames top management for bowing to political pressure to fund large, visible construction projects that are of questionable value in light of the district's declining student enrollment.

According to the report, these projects often produced cost overruns that bled the bond funds dry.

"John O'Connell Technical High School is an example of a school project that suffered from interference with regard to project scope. The project is now at risk for various reasons and the construction firm has left the project," the report states.

Because management failed to prioritize construction projects in light of matching state funds, the report concludes the district is on a collision course that could wind up costing millions of dollars in the near future.

New, often unnecessary, projects are outpacing the supply of available state funds by $153 million and should be reviewed "given that the district's student enrollment is stable to declining."

Other findings in the exhaustive report conclude:

· The department suffers from a lack of leadership, skilled employees, communication and oversight;

· The department purchased three properties within the last four years to build new facilities that may not be needed;

· The department failed to apply for $150 million in state funding needed for future construction projects because the projects were not in the design phase as require by law.

Superintendent Declines Interviews
Although the report was sent to Ackerman in February, so far she has denied repeated requests to release the document, stating through her press secretary that she is reluctant to release a document that "contains errors."

All requests for interviews on the report's findings from Ackerman, Cathi Vogel, the district's chief financial officer and David Campos, the city attorney who advises the district on legal matters, have been declined. As of presstime, the SF Unified School District said it was preparing to hold a press conference concerning the Arthur Anderson report.