Audit Finds $3 Million in Federal Funds Misspent by San Diego Schools

Thursday, Jan. 3, 2008 | San Diego Unified schools misspent more than $3 million in federal funding earmarked for child nutrition and low-income students to pay a one-time bonus to retirees, a federal audit concluded.

“This money was supposed to be in the classroom,” said David Page, chairperson of the district’s Advisory Council for Compensatory Education. Page first questioned the spending in 2004, and felt the audit validated his worries. “You want to use money for the poorest kids to support the retirement of all these teachers? That’s ridiculous.”

State auditors disagree with the federal Department of Education’s finding, which recommends that San Diego Unified pour money back into Title 1, a federal program for disadvantaged kids, and other national programs tapped to pay retirees. How — and whether — the money will be repaid is unclear.

“They’re going to have to figure out where that money is coming from,” said Camille Zombro, president of the San Diego Education Association. “But it’s not coming out of [retirees’] pockets.”

The retirement plan, approved in 2003, boosted benefits for San Diego Unified employees who left the district by July 2003. To coax teachers and principals to retire, San Diego Unified offered employees 7 percent of their salary annually, adding to the regular retirement benefits they’d already earned. The $84 million plan was intended to save schools as much as $20 million a year by replacing long-serving, higher-paid workers with less experienced, lower-earning educators.

The offer proved so enticing that nearly 1,500 school workers quit in a single year — almost 10 percent of San Diego Unified teachers.

To help pay the retirement package, San Diego Unified culled more than $1.5 million from Title 1, $750,000 from child nutrition programs, $250,000 from child development funds, $200,000 from anti-drug programs and smaller sums from assorted programs, including HIV/AIDS education and language lessons for students learning English, between 2003 and 2006.

The sums are a sliver of San Diego Unified’s annual Title 1 funding, projected at $45 million next year. But the dollars still matter to schools. In a single school year, 2005 to 2006, San Diego Unified spent $511,125 of Title 1 dollars on the retirement perks — more Title I funds than the district typically sends to Central Elementary, the district’s second-poorest elementary school.

Federal inspector Gloria Pilotti dubbed the 2003 retirement package “abnormal or mass severance pay,” which can’t be charged to federal programs without permission from the Department of Education. State auditors disagree, calling the pay “fringe benefits” comparable to health insurance or Social Security, which are routinely charged to the special programs that employees serve.

It’s not severance pay, argued Kevin Chan, audits director for the state, because the school employees weren’t fired. It’s not a “normal fringe benefit,” countered Pilotti, because it was a special one-time offer. The question of whether San Diego Unified misspent hinges largely on that distinction, and which label best fits the unique retirement plan.

“The retirement benefit isn’t an ongoing benefit, so the regulations are unclear as to whether it’s an allowable expense,” said Sheila Vickers, vice president of School Services of California, which consults school districts on management issues. “That’s a problem, and I’m not surprised that there’s conflict in interpretation.”

Thus far, the Education Department hasn’t decided whether San Diego Unified will have to repay Title 1 and other federal programs, as recommended by its own Office of Inspector General. San Diego Unified may also choose to contest the department’s finding, Page said.

School district officials were on mandatory vacation and unavailable for comment Wednesday.

“If things weren’t done correctly, and the district has to fix it, we’re fully in support of those recommendations,” said Dan McAllister, county treasurer and tax collector. McAllister is a member of the school district’s Audit and Finance Committee. “… But it’s too premature to say there will be a required payback of anything at this point.”

To Chan, the split between California and federal investigators underscores the confusion over federal funds and how they can be spent. State investigators argued that San Diego Unified did nothing wrong, and “vigorously researched” whether it could charge retirement costs to federal programs. The federal audit countered that the district didn’t heed advice from School Services of California, nor from its own accountant, who twice recommended that the district seek permission before spending federal funds on retirees.

“We need more clarity, in the future,” Chan said. San Diego Unified’s case may ultimately be a cautionary tale. “It’s better safe than sorry, to actually get the (federal) approval in writing.”

Others question the state’s motives for defending the district’s spending. Misspending in San Diego Unified, the state’s second-largest school district, reflects poorly on the state Department of Education, said Diane Haney, president of the local Title 1 Parents Association. And if San Diego Unified is forced to repay federal programs, the state will pay part of the price, Chan said.

“The federal level put on the spotlight, and found that the state hasn’t been doing their job,” Haney said. “It’s like a good-old-boys club, letting things pass.”

Federal officials are due to decide what action, if any, to take in the coming weeks, said Jim Bradshaw, spokesman for the U.S. Department of Education. Typically, the department follows the advice of its inspectors.

“Ultimately, we could threaten a cutoff of funding,” Bradshaw said. “But that would be a last resort. In the vast majority of cases, we’re able to work with [school districts,] to help them comply with the law.”

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