State FCMAT review finds East Side Unified's fiscal risk down but flags deficits, reserves and data systems

The Fiscal Crisis and Management Assistance Team (FCMAT) presented a fiscal health risk analysis to the East Side Union High School District board on May 8, finding the district's overall risk score improved to 21.3 percent but warning the board of several material weaknesses that could elevate insolvency risk.

FCMAT intervention specialist Erin Lillybridge told trustees the district's current FHRA score falls in the low-risk range but that the report's trigger and several material-question "no" responses pushed some sections into high risk. "The district score overall was in the low risk range at 21.3 percent," Lillybridge said. "But there were certain material questions that elevated the risk category to high."

The nut of FCMAT's findings is that the district improved since an FHRA done five years earlier (31.8 percent) but faces three financial pressures that underlie the risk: declining enrollment, a high share of salaries and benefits funded with one-time state and federal dollars, and a multi-year pattern of qualified interim certifications that triggered the review. Lillybridge said the FHRA was triggered by the district's qualified first interim certification and noted the team had performed field work in March, interviewing about 40 staff and reviewing three days of documents.

FCMAT highlighted four sections that contributed most to the risk score: deficit spending; fund balance and reserves for economic uncertainties; uses of the unrestricted general fund in the current year; and information systems and data management. On deficit spending and reserves, the report relied on the district's first-interim projections, when the district was projecting multi-year deficits and a potential failure to meet the state's minimum reserve requirement in the second year out. "Without mitigating adjustments, expenditure reductions or implemented plans, the district was not going to be able to meet the state's minimum reserve requirement in the second year out," Lillybridge said.

FCMAT also warned the district had been using one-time funds to pay ongoing salary and benefit costs and that practice increased risk when those funds expire. "A lot of folks are using that for salaries and benefits and new positions and new services for students," Lillybridge said. "But without clear plans on how to pay or eliminate those costs when those funds expire, that increases your risk for insolvency."

On information systems, FCMAT identified higher risk because East Side operates its own financial system outside the county office of education's system, prints its own warrants and lacks an interface that would allow the county to view activity and provide oversight. The FHRA also noted lingering issues in the district's ability to identify all students who count toward the Local Control Funding Formula unduplicated pupil count; staff told FCMAT the district has made technology changes to improve counts but residual accuracy issues existed.

Superintendent Glenn VanDerzee told the board the district welcomed FCMAT's work and emphasized improvements. "This district has been dealing with those issues and making those tough decisions in the meantime to stay fiscally healthy," he said, noting the district had since adopted a second interim with a positive certification and taken reductions that occurred after the FHRA's trigger date.

Trustees moved to receive the report. Trustee Cortese made the motion to accept the FCMAT report and Trustee Herrera seconded; the board voted unanimously to accept it.

The report lists steps the district should take to reduce risk and notes some areas of sound practice'for example, FCMAT scored internal controls and fraud prevention at 0 percent risk and praised the business office's processes. FCMAT also included a comparative appendix showing what changed since 2020.

Ending: FCMAT's FHRA will be published on the agency's website after the district meeting; the board formally received the report and directed staff to continue implementing and monitoring the district's fiscal stabilization measures and the corrective items FCMAT identified.