Oakland’s $11 Million Hole and the $1 Billion Debt Beneath It

A guest post from Oakland parent Joshua Krafchin, that digs into the (mis)use of OUSD facility bond money and what appears to be some real issues, you can follow Joshua on his medium page.

Before I go any further, a few notes:

1. Although this article is critical of Oakland Unified School District’s financial transparency practices, my sense is that there is movement in the right direction to create transparency.
2. If you work for or with OUSD, I want to express my gratitude to you for taking care of our kids. And thank you to everyone working to make sure Glenview Elementary gets built well and on-schedule. While I think this system needs a lot of work, I’m amazed by and proud of the people working with it.
3. My sense is that a combination of factors (such as shifting leadership and priorities, bureaucracy, legacy costs and complicated laws) all come together to present a mighty challenge to institutional transformation. OUSD teachers, staff and leaders work under challenging conditions. Thanks for doing your best regardless.
4. I believe our public schools need more money, not less, but it’s tough as a member of the public to support taking on additional debt without seeing strong financial transparency, controls, reporting and proactive communication. Let’s rectify this quickly and then go fight to appropriately fund OUSD.
5. This article focuses primarily on facilities-related finances, not the General Fund.

“The good news is that we knocked $4 Million off construction.”

That was the opening message from OUSD 3 months ago when I dragged Mikaela (my 3-year-old) to a meeting about why her (hopefully) future school, Glenview Elementary in Oakland, was still a hole in the ground and 2+ years behind schedule.

Something felt icky.

5 public information requests, conversations with officials at every level of local government, an ever-growing list of questionsand dozens of analysis hours later, it still feels icky.

While OUSD’s mid-year general fund budget crisis recently grabbed headlines and directly impacted the lives of students and teachers, beneath the surface is another enormous mess that also boils down to insufficient financial reporting, controls and transparency.

Despite carrying nearly $1 Billion in general obligation bond debt, OUSD does not have a CFO. The job’s been open since May 2017.

The problem with the $4 Million savings claim, as seems to be endemic to much of OUSD’s financial communication, is that it’s unsubstantiated. In fact, it is directly refuted by documentation showing that not only is the project currently slated to cost $14 Million more than originally budgeted but $30 Million more than communicated to the Glenview community years ago after raising the $475 Million Measure J bond.

A November SF Chronicle article about Glenview highlighted the delays, cost increases and pending federal indictment against one of the 3 general contractors on charges of conspiring to defraud the US government in an unrelated construction project.

In conversations with Glenview community-members, I’ve observed a history of changing expectations and promises. In the last 6 months alone for example, official communications showed 4 different budget numbers and a Glenview project report misrepresented soft costs and remaining budget by $100s of thousands of dollars.

I’ve also heard rumors that the construction contracts were originally no-bid and that, in keeping with historical practice, OUSD accepted contractor/consultant estimate at face-value rather than negotiate costs, but it’s impossible to know for sure because OUSD keeps negotiations private and refuses to share bids after the negotiation. While Glenview construction costs keep rising, OUSD asks the community to okay project scope and cost reductions without giving a detailed accounting of where those savings are being applied or which project element costs are rising.

The Problem Is Bigger Than Just Glenview

At first, I was led to believe it’s just a Glenview problem, but it’s not.

I got my hands on the Measure J spending plan presented to the school board on April 9 2014. It mentions only 7 projects by name. I cross-referenced these with the most recent Measure J budget and historical expenditure details by site breakdown.

1. The Fremont High School replacement was initially budgeted at $131 Million, and the most progress it has seen is losing $51 Million in budget with $2.5 Million spent.
2. In West Oakland, The Foster Central Kitchen has already cost nearly $15 Million and is at a similar stage of hole-in-the-ground as Glenview.
3. Glenview Elementary hole’s expenditures to date are reported over $11 Million, but that number is going to jump significantly as soon as recent invoice payments are accounted for.
4. Like Fremont, Madison MS hasn’t gotten started and has had its budget cut (around $4M), but it’s already cost $4.5M.
5. Greenleaf Grade Expansion Project is the only project near completion thanks to an additional $8M of budget.
6. Washington Sankofa lost $14 Million of budget, has spent $1.5 Million and is still incomplete.
7. And finally there’s the Roosevelt Modernization project that lost all of its initial $23 Million in budget.

While Glenview and Central Kitchen (the holes) plus Greenleaf got budget increases totaling $31 Million, the other 4 projects have had their budgets cut $92 Million.

Only 1 of these 7 projects is anywhere near complete with $72 Million in project expenditures to date and counting.

And when you look at Measure J budget/expenditure reports, they don’t even show estimates for projected remaining costs. In other words, it’s hard to get a grasp on what it will really cost to finish all of the projects on the Measure J list. We’re flying blind.

Priorities Keep Changing And Wasting Money

When taxpayers approved Measure J, they were told that projects would include:

• Seismic upgrades of schools and classrooms to reduce danger from earthquakes
• Asbestos and lead paint removal
• Upgrade science labs, classrooms, computers and technology
• Repair bathrooms and unsafe playground areas
• Upgrade kitchen facilities to improve nutrition and nutritional education

In the 5 years since Measure J was passed, around 40 Measure J projects have been completed at a cost of $21.8M ($6M for turf field replacements, $4M for restrooms, $2M for play structures, etc.). But the single largest completed expense line item isn’t even at a school site. Somehow, $2 Million was spent paving the Facilities building at 955 High Street.

There’s NO mention of 1 single seismic upgrade, asbestos/lead removal, science lab/tech upgrade, or kitchen upgrade project having been completed.

Although we’re 1/3rd of the way through Measure J funds (and nowhere on the original primary Measure J projects), we’ve already spent $30+ Million on consultants and admin staff responsible for coordinating the bond program, plus $1.4M for yet another Facility Master Plan reprioritizing these funds. It appears at least 2 major budget reshufflings have occurred since Measure J passed.

$127.5 Million of Measure J money is sitting in a bank account. It’s been there for at least 2 years. OUSD reports having earned $2.2M of interest all-time on Measure J, which I estimate represents around a .5% interest rate, but the holders of the bonds are earning 4–5% on that same money. In other words, we’re paying 10 times as much as we earn on borrowed money.

So not only are projects stalled, schools torn down, and prices soaring due to inflation, but Alameda County tax payers are shouldering the burden of $10s of Millions of unnecessary interest payments. If we hold up construction, we bleed money to consultant retainers, admin salaries and inflating construction costs, not to mention the high cost of holding onto unused cash.

I’m Concerned That There’s Insufficient External Financial Oversight

The only reason I know most of this information about Measure J is because there’s a Citizen’s Bond Oversight Committee who’s been asking similar questions. However, their recommendations aren’t really being followed, and they have no enforcement power to change that. When I went to their monthly meeting in December, no senior accounting or finance representative from OUSD was present to answer detailed questions about the reports that had been provided.

Alameda County, despite collecting tax payments and managing the bond fund raises, takes no responsibility for how OUSD uses funds and directs all financial questions back to OUSD. The Annual OUSD audit doesn’t even directly mention Measure J. Admittedly, the Measure J audit had no material findings, which I find hard to reconcile with my personal investigation, meaning either the auditor had access to more detail financial information or just didn’t probe very deeply.

As opaque as Measure J finances are, there are other money sources that are even harder to crack, particularly developer fees. No one can tell me where developer fees come from, how much of them there are and for what they’re intended. Although my understanding is that FCMAT is now helping OUSD, my feeling is that there has been little comprehensive external financial oversight. Put differently, every local government agency, official or expert I’ve talked to has admitted to significant roadblocks to being able to understand OUSD’s finances.

I’ve seen efforts to improve financial transparency, but the changes are slow. If answered at all, PRAs contain partial information and answers. Financial reports have inconsistencies, missing information and unexplained changes from report to report. Numerous times, I’ve been promised meetings with senior accounting or finance members but have been incapable of actually getting in front of someone.

Let me be clear. I’m not a lawyer, accountant or financial expert. All of the issues I’m observing could be simply explained away as the result of a large bureaucracy buckling under the strain of too many laws, stakeholders, shifting priorities and annoying members of the public like me. My inability to wrap my mind around what’s really going on could also just be my lack of experience and know-how.

I recommend we call a moratorium on placing blame on any individual or group of individuals, even offer immunity if there has been illegal activity — let’s assume it’s a systems problem, and everyone working in it is doing our best. We’re all human with our strengths and limitations. The key is to get to the bottom of what’s going on.

That being said, I challenge all of us not to accept this level of dysfunction and opaqueness from our most important public institution. We need answers, clarity and access to information, and OUSD employees should feel safe and empowered to provide it.

My Top 4 Requests

1. Hire a permanent CFO (job currently vacant) whose is responsible for making #1 happen. Clear political, procedural or policy challenges that would impede a high-caliber CFO from building a high-caliber team, including a real commitment from the superintendent to fully empower the CFO.
2. Prioritize high-caliber staff over consultants. Consultants may get some jobs done in the short-term, but they tend to be more expensive and take institutional knowledge with them when their contract runs out.
3. In Q1, create a Saturday Symposium on OUSD’s Financial Crisis. Invite politicians, education experts, parents and students, community members and OUSD staff and leadership. Let’s use this day to disseminate high-quality financial information, identify key knowledge gaps and bring together specialized skill-set individuals who could help fix problems.
4. Prioritize transparency, specifically:

• Create accurate and timely financial reports with high and low detail versions for different stakeholders — see this outline for specific recommendations.
• Open up OUSD’s financial data so that the public can help with analysis, reporting and problem-solving.
• Build a system that empowers the community with fast answers to financial questions and proactive education around why and how financial decisions are made.
• Extend legal immunity to employees to encourage full financial disclosure in case of inappropriate financial dealings. This is not to imply that I have found any illegal activity, but it’s more important we fix the finances than go after people, and we should make that clear.

If this article contains any incorrect information or other issues, please let me know as soon as possible. I am @joshuakrafchin or joshua.krafchin(AT)gmail.com. Feel free to connect to team up.