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The last time Phil Stover saw a state government writing IOUs to schools was back in 2004.

That was in Fort Lauderdale, Fla. Faced with a cash shortfall after the state was hit by four devastating hurricanes — Charley, Frances, Ivan and Jeanne — Florida lawmakers took that unprecedented step. The IOUs lasted a couple of months, Stover said. Once the state caught up on its finances, it made school districts whole again.

But in San Diego, where Stover now works as deputy superintendent of business at San Diego Unified School District, getting short-changed by the state has become a way of life.

For years now, the state has been getting further and further behind on its payments of tax revenues to schools. Faced with a constant shortfall in cash, Sacramento has steadily increased the amount it has to write in IOUs to school districts and is constantly behind by several months in delivering cash to schools.

What started in 2002 as a one-week delay in getting about $2 billion out to districts has now ballooned into a $10 billion problem statewide.

San Diego Unified alone is currently owed about $70 million. Other smaller local school districts like Grossmont Union High School District and San Marcos Unified are owed tens of millions of dollars apiece — equivalent to around 30 percent of those districts’ entire budgets.

Though they’re getting IOUs, the districts still have to meet payroll each month and pay all the other expenses involved with keeping schools open. So they borrow cash. Every year, districts across the county have to take out loans for six months or a year to cover the shortfall in payments from the state.

And because borrowing money costs money, school districts now must pay anywhere from tens to hundreds of thousands of dollars each year in interest on those loans and in fees to brokers, redirecting critical funding away from local children and onto Wall Street.

This year, San Diego County school districts will be shortchanged about $650 million by the state, said Lora Duzyk, assistant superintendent of business services at the County Office of Education. Neither the state nor the county has an official estimate of how much it will cost to borrow all that money. But across the county’s dozens of school districts, the price tag will be in the millions.

That money never gets paid back to districts. The state doesn’t reimburse for the interest schools have to pay on their loans or any of the other costs involved with borrowing money. At a time when schools are already feeling the pinch after enduring billions of dollars in cuts from Sacramento, they now also have to deal with not even getting the money they’re promised on time.

“School districts are now essentially extending no-interest loans to the state of California,” said Ron Bennett, CEO of financial consultancy School Services of California.

Bennett compared the state’s IOUs to a strapped employer telling his employees every month he can only pay part of their paychecks. The employer promises to pay in full the following month. But the next month he only pays the past due salary and again defers most of the new paycheck until the following month.

And so on, until the employer reaches the end of the fiscal year. Then he has to roll everything he owes his employees into the next year. Meanwhile, the employees, who still have to eat and pay rent, are spending on their credit cards and incurring fees from banks for borrowing.

For Sacramento, the choice is stark: Defer the payments to school districts or cut districts’ budgets to reflect the fact that the state doesn’t have the cash to pay them.

The amount the state owes school districts has grown exponentially since that first one-week deferral.

In 2006, it was $1.3 billion. By 2008, it had grown to $4.5 billion. This year, it’s $10.4 billion. For perspective, this year the state’s entire spending on schools and higher education is projected to be $36.2 billion.

As more and more of their funding has been delayed, San Diego school districts have had to get inventive.

They’ve had to boost the amount they borrow in short-term loans by selling bonds. The County Office of Education has helped small districts by allowing them to group together to make loans and on occasion districts have been allowed to borrow from the county treasury. And with the deferrals continuing, more and more school districts are starting to feel the pinch.

Gary Hamels, assistant superintendent at San Marcos Unified School District, said this year is the first time his district has had to borrow money to make up for the delay in funds from the state. Borrowing the cash to stay afloat will cost his district between $200,000 and $300,000, Hamels said.

Grossmont Union High School District has been short-changed $19 million this year. When the state first started the deferrals, the district managed to get by on its cash reserves. But for the last two years, it’s had to take out loans to get by, said Scott Patterson, the district’s deputy superintendent of business services.

This year, the district will pay around $65,000 in interest on its loan, Patterson said.

“It’s frustrating. I look at that $65,000 and that’s a teacher I could’ve hired, but instead I’ve got to spend it borrowing this money,” Patterson said.

At Santee School District, Karl Christensen, an assistant superintendent, said his district’s only had to borrow $1.3 million this year, thanks to healthy reserves. Still, that’s cost around $38,000 that could have been spent on kids, he said.

San Diego Unified staff estimated it will cost the district about $250,000 to borrow cash to make up for the delay in getting the $70 million it is owed by the state. The district can cushion the impact of the IOUs largely because it already borrows massive amounts of money to meet its cash-flow obligations, district officials said.

Across the county’s dozens of districts, the impact gets magnified as schools continue borrowing more and more. The amount of money borrowed by San Diego County schools has spiked in the last two years, from $292 million in 2009, to $360 million in 2010.

Two months into the current fiscal year, local schools have already borrowed $371 million.

Will Carless is an investigative reporter at voiceofsandiego.org. You can reach him at will.carless@voiceofsandiego.org or 619.550.5670.

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Will Carless

Will Carless was formerly the head of investigations at Voice of San Diego.

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