Debate over $150 million San Francisco school district windfall

‘We’re looking at the ways to boost morale’

The financially beleaguered San Francisco Unified School District faces a quandary: What to do with an upcoming $150 million windfall.

The district already has proposed a $125 million budget balancing plan to address its structural deficit, a plan that largely relies on budget cuts rather than the windfall. The district has until Dec. 15 to submit the plan or increase the risk of being taken over by the state.

The question now is what to to do with the windfall, which comes from funds collected through Proposition G, a 2018 ballot measure to raise educator wages. Prop. G quickly faced a court challenge, but a California Supreme Court judge last month upheld the measure. While awaiting a ruling, the district went ahead and raised educator wages. Now it is looking to use the Prop. G funds for other purposes — many of which the teachers union opposes.

District staff and at least some school board members are leaning away from using the one-time windfall to plug operating costs as it has in the past. They believe that, faced with a downgrade of its bond credit rating, the district should replenish its reserves and fund pension liabilities — pegged at about a staggering $1 billion — that are key indicators of fiscal health.

“Prop. G is a unique and valuable opportunity for the district to evaluate our opportunities,” said Meghan Wallace, SFUSD’s chief financial officer, at a committee meeting on Wednesday. “I would anticipate that if we don’t take a balanced approach with the use of these funds, we will see further declines in these (credit) ratings. The reality is with things like health care, pensions, retirement — these things keep growing faster than our revenue growth.”

Meanwhile, both state and city officials are keeping a close eye on the district’s budget decisions. The City loaned SFUSD $26.6 million in 2019 to help pay for the raises given to educators. However, Mayor London Breed and Supervisor Hillary Ronen proposed a plan to forgive the loan with conditions. (School districts are predominantly funded at the state level and are entities independent from City Hall.)

In four budget options presented this week by the district, all assumed use of the full $150 million windfall, with $40 million of it to help replenish its so-called rainy day reserves. SFUSD tapped a total of $93.4 million from the reserves to cover costs while Prop. G funds were unavailable.

The district is also weighing how much to invest in health care benefits and pensions for retired staffers, formally known as Other Post Employment Benefits (OPEB). Staff suggested using as little as $20 million for an OPEB trust formed in 2017, leaving $90 million to help balance the budget; another option was to use as much as $75 million for the trust, leaving $35 million to help balance the budget.

Another key issue is that SFUSD has over $1 billion in unfunded pension liabilities, which could increase to $1.5 billion in the next five years, according to a staff report from November. District staff recommended devoting at least $50 million immediately to make a significant dent in liabilities while boosting the annual investment fund from $3 million to at least $10 million.

Another, more immediate, key problem is educator retention. Vacancies are consistently opening and SFUSD is struggling to find replacements, leading district staff to recommend considering using $25 million in Prop. G funds for one-time incentives for educators. That would leave $25 million to help balance the upcoming year’s budget using the Prop. G windfall.

“This is a year like no other,” said Superintendent Vincent Matthews at the meeting. “We still have people during the week — three, five, seven people will resign. We’re not able to fill those holes. It’s causing wear and tear on staff and, to be honest with you, taking morale down. We’re looking at the ways we could possibly do everything we can to keep people from leaving and try to boost morale.”

To United Educators of San Francisco President Cassondra Curiel, the proposed $25 million is a fraction of the amount that’s needed to make a difference in retaining teachers. She said determining the full use of Prop. G funds, which was intended for educator pay, should first be negotiated.

The issue of how much money to devote to future health care benefits and pensions “is raising a lot of eyebrows,” Curiel said. “We’re now having a discussion around having more money put into an additional savings account of theirs which is supposed to be, in theory, and hopefully in practice, for educators who retire in the future. But we have educators right now who can’t pay rent, who are leaving the profession.”

“From my perspective, recognizing and compensating our educators is paramount to supporting our young people with their learning,” said school board member Jenny Lam.

Curiel also strongly agrees that one-time funds should not be used to plug the ongoing deficit.

This puts the district, the union and at least some board members in relative agreement to minimize use of Prop. G funds in balancing the budget. To do so, the current proposal is $50 million would come from schools sites, $10 million from direct services like programming, $14.1 million in indirect services from central office, $12.4 million in operations and $3.5 million in administrative costs. One-time sources totaling $35 million would balance the rest of the deficit for the upcoming school year.

Enrollment declines statewide also have school districts looking to alter the state’s school funding formula, which is based on the number of students enrolled and attendance. Gov. Gavin Newsom will introduce his proposed budget in January, which may contain measures that could improve the long-term outlook for SFUSD. But the district must make changes based on current reality.

“If we use some of the Prop. G funds to cover the deficit in the next two years, it’s just creating this cliff again in the third year and that just feels like putting off the hard decisions,” said school board member Matt Alexander. “It just concerns me to use these one-time funds to deal with a structural deficit.”

The state-appointed fiscal expert, Elliot Duchon, will outline recommendations at Tuesday’s school board meeting. Alexander and school board member Mark Sanchez will also propose an alternative budget proposal at Tuesday’s meeting, one that seeks to prevent or greatly reduce cuts to school sites.

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