SUPERINTENDENT RESPONDS TO CRITICISM OVER COPS

●●smf's 2¢: some, including 4LAKids, the Daily News, former boardmember David Tokofsky and UTLA President Duffy (¡4 troublemakers 4!) have questioned the Board of Ed’s wisdom in entering into a large amount of Certificate of Participation (COP) debt. (Technically COPs are not debt, they are complicated financial instruments in which an individual buys a share of the lease revenues of an agreement made by a municipal or governmental entity, rather than the bond being secured by those revenues*; COPs are designed to circumvent the Prop 13 requirement for voter approval of public debt …but they waddle duck-like in thE debt direction).

Mostly COPs must pay back principal and debt service costs from the general operating funds (the annual budget) , rather than bond debt. In the best of worlds (where we are not) bonds would fund capital improvements (building and construction, solar cells on rooftops), operating funds should fund operations (teachers' salaries, supplies, etc.)

Below the superintendent does a good job presenting his position and the board’s decision:

From: Superintendent Ramon Cortines
Sent: Thursday, April 15, 2010 1:30 PM
To: LAUSD EMPLOYEES
Subject: LAUSD Issuance of COPS

Dear LAUSD family and partners,

THE FACTS:

I want to take this opportunity to clarify why the District is selling Certificates of Participation (COPs) for various important projects. Let me assure you, there is no General Fund impact for the first year and a $200,000 in 2011-12 because of a capitalized interest COPs financing structure. First and foremost, my responsibility as Superintendent is to oversee the academic achievement as well as maintaining and improving the infrastructure of this 618,000-student district that has 891 K-12 schools and more than 200 other educational centers. This is similar to a home owner needing to take care of paying the mortgage as well as replacing the roof, installing more efficient windows and purchasing major appliances even though times are tight. LAUSD is a long-term investment and as such requires us to sometimes use funding options to save money in the short and long term, and to create efficiency overall.

Let me say that the issuance of these COPs is a common funding structure used by school districts across the state to finance capital projects. Trust me, I am well aware of the risks involved in terms of perception and repayment but I believe these projects and their ultimate value to the District to outweigh the potential downsides. While none of the COPs money can be used for across the board salary increases, some will provide jobs.

We face another difficult year next year in 2011-12 with at least a $263 million deficit. I am attempting to look to the future to save money that can be used in the classroom. It is that simple. Any savings from the General Fund is money for the classroom.

Each of the projects needed to meet strict criteria to even go forward:

a) Immediate relief (savings) to the General Fund Budget of $26.4 million;

b) Financing will enable the District to maximize and meet matching fund deadlines from granting agencies, some of which will give us $10 for every $1 we spend;

c) Project will result in greater efficiency and will enable the District to avoid greater costs;

d) Funding the project will minimize the risk of a critical system failure;

e) Project is eligible to be funded by Measure Q but needs to start before Measure Q funds are available. Therefore, this funding can serve as a bridge to Measure Q and then paid back when Measure Q or other bond funding becomes available.

Proposed Capital Projects.   Following is a list of capital projects that were approved by the Board of Education on Tuesday, April 13, 2010:

1.    School Cafeteria Equipment Replacement (Eligible for Measure Q or other bond funding).  There are certain school cafeteria equipment items, such as freezers, refrigerators, beverage coolers, hot food cabinets, ovens and steamers, that Maintenance and Operations can no longer service.   This affects the school site’s ability to serve meals.  Adding to the challenge, many families are experiencing job losses, so more than 79 percent of our students are now utilizing the free and reduced lunch program, resulting in pressure to serve more meals even as enrollment declines. In fact, the District has served more than 10 million additional meals in the last two years. The total project is $5 million and the annual debt service of approximately $100,000 to $300,000 will be provided by Cafeteria Fund until Measure Q bonds can be issued.

2.    School Bus Replacement (Eligible for Measure Q; Maximize Matching Funds).  Southern California Air Quality Management District (SCAQMD) has initiated a grant program to induce replacement of existing buses with buses that run on alternative fuels.  The SCAQMD grant does not cover all capital costs and thus requires the District to match the grant funds. The District will be able to purchase 260 new alternative fueled school buses worth $45 million but only pay $3.5 million in COPs financing. LAUSD can do this by taking advantage of the SCAQMD grant and infrastructure funds totaling $38.5 million.  The District will also utilize $1.2 million from Clean Cities Grant and $1.9 million of Measure Y funds for this project. 

1. Integrated Student Information System (ISIS) Completion (General Fund Relief ; Eligible for Measure Q).  The Board approved a revised budget for ISIS in 2007.    The revised plan identified COPs and General Fund as funding sources.  As part of the District’s budget balancing strategies in 2008-09 and 2009-10, some of funds earmarked for ISIS were reduced. As a result, a total of $26.4 million is needed to complete the ISIS project as approved in 2007.  The financing does not increase the requirements of the project.  It is important to note the District cannot exit the Modified Consent Decree (Special Education) without the completion of the ISIS project. 

1. Automation of Classified Seniority Calculation Process (General Fund Relief; Increased Efficiency).   The Board of Education has approved a significant reduction in classified staff and Personnel Commission has been working diligently to process these reductions.  This process involves a manual calculation of employee seniority which takes an average of about 20 weeks. Every week the reduction in force is delayed, it costs the District $1 million. An electronic employee seniority calculation system will reduce the processing time by up to 4 weeks in the first year and 16 weeks in subsequent years.  If COPs financing is approved and the system is implemented as proposed, it can potentially save the District $4 million in fiscal year 2010-11.  The total cost of the project is $2.1 million.

5. Bell Federal Education and Career Center (Eligible for Measure Q).  In September 2008, the United States Department of Education (USDE) awarded LAUSD land to construct the Bell Federal Education and Career Center. USDE requires that LAUSD complete the project by September 2011.  If LAUSD does not complete the project, the District may be at risk of losing title to the property.  The total project is $45 million and is eligible for Measure Q funding.  Financing is necessary until Measure Q bonds can be issued.

6. Integrated Financial System (IFS) Replacement (Increased Efficiency; Risk Mitigation).  IFS continues to be the District’s official book of record even after implementation of Payroll and HR modules has been completed.  The District no longer has a contract for the maintenance of IFS and IFS programmers on staff have been greatly reduced due to recent budget reductions. Without vendor support of either the hardware or software, the District has an unacceptable risk of system failure. It is important for the District to move on to the full implementation of the new Enterprise Resource Planning (ERP) system in order to fully exit IFS and have one integrated system.  This risk-avoidance project will cost $41 million.

1. Garfield High School Fire Damage (General Fund Relief).  In May 2007, a fire destroyed the auditorium of Garfield High School.  Subsequent review of the damage indicated that the entire building, which includes the administrative office of the school, will need to be torn down and rebuilt.  Insurance reimbursements were not enough to cover all the costs and the District is currently in discussions with the insurance company.  In the meantime, the school cannot wait for the settlement of the insurance claim to rebuild the auditorium and the office.  This project will cost $51 million.

1. Solar Panel Installation (General Fund Relief; Eligible for Measure Q).  The District has 90 solar panel installation projects under way that once completed, will be eligible for approximately $32.6 million in utility incentives from service providers. The total cost for these projects is approximately $120 million.  After considering the various restrictions on these incentives, it is proposed that $20 million of these incentives be used to offset the cost of the project, thereby reducing the financing requirements to $100 million.  Upon completion of the projects the District will achieve an estimated energy cost savings of approximately $5 million per year, thereby providing general fund relief for years to come.   

1. Utilization of Vacant Space at Roybal Learning Center (General Fund Relief). There is a vacant space at Roybal Learning Center that can be used by District offices that are currently occupying leased space.  We can save money by canceling $3.8 million in annual leases—School Police headquarters at a savings of $1.4 million per year, Transportation headquarters at $1 million per year, and another $600,000 for a bus garage lease—by moving various employees to Roybal. In order to do this, it is necessary to make some improvements to the space to make it suitable for office use.  This includes construction of cubicles and offices.  The total cost for this project is estimated to be $25 million and it is expected that the annual amount of freed up funds resulting from the lease terminations will be equal to or exceed the amount required for annual debt service payments.