KC School District is striving to change culture of lax financial oversight
MARK DAVIS and JOE ROBERTSON
The Kansas City Star
Next April, the Kansas City School District wants voters to do what they haven’t done since 1969 — raise their property taxes to help educate kids.
The biggest obstacle for what could be a $100 million bond issue?
Voters decided long ago that the district just didn’t know how to handle money.
The Kansas City Star explored this deeply dysfunctional financial culture in a review of 15 years of district records and in interviews with school board members, district officials and industry experts. It found that the district didn’t enforce some of the most basic financial controls that any organization, private or public, needs to make sure money is handled and spent properly.
Superintendent John Covington and his team realize that no bond issue will pass until they wipe away this financial legacy of wasting millions. And the era of flush resources that made the financial folly possible is over. Declining budgets are forcing the district to account for every dollar.
Getting the money right is exactly what the new financial team is trying to do. It’s the necessary first step in the massive effort to build an educational system that finally works.
A lot of problems need fixing. The Star’s review shows:
The district lost control of vendors.
An open wallet and casual oversight led to bloated business with many of the thousands of vendors it used. In one case, the district lost $7.7 million from contracts to run cafeterias. In another it paid a price that “shocks the conscience” for two shopping bags of underwear and socks.
It let employees ignore purchasing rules.
Employees spent millions beyond the district’s control. They didn’t file purchasing orders and weren’t punished for such mistakes. Bills hit the district without notice, or even after the employee who made the purchase had retired.
It didn’t fix repeated warnings from auditors about bad practices.
Red flags that nearly $1 million flowing through student activity accounts was ripe for abuse were ignored until $50,000 disappeared at one school and the district fired a popular principal.
It didn’t spend all its grant money.
Poor monitoring meant that money within the district’s reach never reached students. In 2008, it left 30 percent of its grants unspent. It failed to use two-thirds of a $1.5 million math and science grant.
“We didn’t learn how to take care of money when we had it,” said Jewell Gould, once a teacher in the district and now director of research for the American Federation of Teachers, AFL-CIO. “Nothing was ever put in place that helped them be frugal.”
Once bathed in a $2 billion effort to desegregate its schools, the district now thirsts for funds amid a weakened economy and crumbling state support.
Its operating budget for the start of school this year is $247.7 million — down 21.7 percent from the previous year because of sharply smaller revenues — for teaching, feeding and transporting students; keeping classrooms lit and warm; and otherwise running the district.
Direct instruction of students will eat up $114.5 million of that, the smallest such purse since 1990. It provides an average of $6,124 to teach each student enrolled, from prekindergarten through high school, a 12 to 22 percent cut from the average spent on each student the previous three years.
All this is after Covington’s widely watched effort to rightsize operations — cutting more than 1,000 jobs and closing 24 schools, all of which eliminated $51 million in costs.
It reflects a 30 percent savings on $100 million in vendor contracts and every other nickel in savings that chief financial officer Rebecca Lee-Gwin could scrounge.
There simply isn’t money to deal with long-neglected maintenance on the buildings that remain. That’s why the district wants a $100 million bond issue.
Although talk of a bond issue had surfaced in the spring, this is the first time the district has said it hopes to put it before voters as early as April.
Lee-Gwin, who joined the district in August 2009, is optimistic that voters will deliver when they see that the district is shaking off its ugly financial legacy.
“It’s all about credibility. It’s all about whether or not people believe what we’re doing, believe in what we’re doing.”
Vendors and workers
Covington came to the district knowing that the way it did business was all about jobs and contracts, as he says, “for adults.”
So he knew what to expect when he let all of the district’s principals go so he could hire from scratch. “Did people pressure me to hire certain people back? Yes.
“Did I do it? Hell, no.”
Last spring Covington made a pledge to bankers and business leaders.
“We are going to make sure, under my watch, that the days for making decisions based on the best interest of adults, and this patronage and cronyism that has been so long known to have had a negative effect on how we operate public schools in Kansas City — please know that while I sit in this chair, those days are gone.”
The district had developed a reputation as a feeding trough for vendors and an employment agency for those with connections.
Although those problems were well known, they were poorly documented. Challenges to the system came largely behind the scenes. Public actions barely rose above shoulder shrugging.
No one has publicly called out those adults who have benefited at students’ expense. No one has gone to jail for milking the district.
Former school board member Bill Eddy complains that too many vendors basically survived on school business and were never evaluated for any value they brought. District hiring too often reflected family ties, political connections and friendships.
Eddy said he urged Covington to get rid of “parasites,” though he didn’t offer Covington any names privately, and he won’t list them publicly now.
Duane Kelly, an 11-year board member, said Covington had tackled some tough issues.
“They cleaned up these contracts and, without naming names, fired some people. He’s gotten rid of some people who over the years have been negative,” Kelly said.
Lee-Gwin said the district’s “absurd” list of 6,200 vendors had been pared to a manageable 985.
AlphaGraphics printers, owned by Matt and Haley Haar, was one of the vendors cut off. It only did a small amount of work, and usually when the district needed something at the “very last minute,” said Haley Haar.
The Haars said that they suggested ways the district could save money but that it was indifferent to combining orders or making other changes.
Lee-Gwin said the district is working now to get more bang for its buck.
A new deal with Afrikan Centered Education Taskforce Inc. to run the African-centered program saved more than $1 million.
The district has pared the cost of its after-school program contract with the Local Investment Commission from $5.3 million to $1.6 million — a $3.7 million cut.
“We’re dropping a good $30 million off of ($100 million in) contracts,” Lee-Gwin said.
School board president Airick Leonard West said that when he joined the board in 2008, vendors would come to the district seeking payment for work without having contracts or presenting any evidence that work had been done. Still, the district paid.
West said he didn’t see that anymore.
But at least one approved vendor beat the new system last winter.
Phillip True had offered to help provide clothes to homeless students. In December he delivered boys and girls underwear and socks, torn from their original wrappings, repackaged in zippered bags and stuffed into two shopping bags. Delivery came so late that the district already had turned to other suppliers.
Worst of all was the $1,360 price. A formal rejection letter said the tab “shocks the conscience.”
Still, True got what he’d charged. He did not respond to a request to comment.
Lee-Gwin called the incident an “outlier” and said the district no longer did business with True. The underwear shouldn’t have been accepted, and payment went out before the circumstances became clear. At that point, she said, trying to recover the money would have been too costly.
More effort has gone into stopping more substantial losses that the district has suffered feeding students, most of whom qualify for free or reduced-price meals.
The district was losing money serving meals itself four years ago when it hired Chartwells to run the food service program. Instead of saving money, losses increased sharply, and both sides blamed the other. Chartwells declined to comment for this article. The district turned to another vendor, Sodexo.
Ingrid Burnett, a board member at the time, recalled that the process was rushed and missed a critical step.
“We never stopped to examine what went wrong with the last one in order not to make the same mistakes with the next one,” Burnett said.
Heavy losses continued. Sodexo managed to cut them, but not enough to extend its two-year run. The district again plans to run the food service itself.
Lee-Gwin said cutting the number of schools and ensuring that each had its own cafeteria should reduce costs enough so the district can break even.
The district also has taken several steps to rein in district employees.
Auditors noted as far back as 1997 that employees weren’t following spending procedures. The district would pay bills even though employees hadn’t filed requisition forms and purchase orders, or even determined whether funds had been budgeted.
Employees who repeatedly ignored procedures weren’t disciplined.
Lee-Gwin said she began to change that behavior by repeatedly alerting departments about spending procedures and monitoring the paper trail.
Roosevelt Brown, who was Covington’s original choice to lead district operations but who left in May, said behavior didn’t change right away.
“People were refusing to conform to the process. They were used to doing it the way they wanted.” The district also cut down sharply on purchase cards, the equivalent of a corporate credit card. They have disappeared from the ranks of principals and most administration employees.
Now it takes a purchase order, and that requires planning and justifying costs ahead of time. Lee-Gwin said that cut the food tab for employee meetings to $406,000 from $722,000 in 2009.
The district also warned vendors it wouldn’t guarantee payment for jobs that failed to go through purchasing channels.
Lee-Gwin said it had taken time for the tighter controls to change behavior, so lapses still might blemish the district’s next report from auditors.
But since July 1, she emphasized, no purchase order has meant no money.
A main failing of the district is that it continues to make the same errors over and over.
In the late 1990s, problems included repeatedly hiring people for jobs that weren’t budgeted or had already been filled. Audits show it took three years to end the practice.
Slow reporting of deliveries at schools left goods vulnerable to theft and drew repeated warnings. Persistent problems tagging and tracking district inventory left $4.7 million in supplies unaccounted for in 1999.
For nearly a decade, independent auditors raised questions about the district’s internal audit effort, most notably repeated failures to follow up on recommended changes.
Four summers ago, the district got a sobering review from the Council of the Great City Schools, which works with urban districts to help them improve operations.
Years of red-flagging, according to the council’s 2006 report on the Kansas City district, had produced little effort toward a whistleblower policy that could ferret out misdeeds and waste. Nor had management heeded repeated warnings that it wasn’t enforcing existing procedures, establishing policies or providing oversight.
A year later, the district brought in a new outside audit firm. This set of fresh eyes turned up 32 findings, 21 of which internal auditor Cynthia Bradford told the school board she had seen before.
Those 2007 findings included the first warning that student activity funds weren’t safe, as well as a second reprimand for not using Head Start dollars correctly.
Auditors also found that managers of some federally funded programs weren’t aware of previous problems and therefore couldn’t fix them. Some managers didn’t even know about their program’s federal requirements.
Nevertheless, Bradford penned a hopeful letter to the school board. The audit report amounted to a “great tool” and corrective steps would be taken “this year,” she wrote.
But audits in 2008 and 2009 found the district still had not fixed the lax cash handling in student activity funds.
The most recent alarm sounded just as the district was investigating Jamia Dock, the principal of its flagship high school, Lincoln College Preparatory Academy.
In a complaint filed with the Missouri Department of Elementary and Secondary Education in December, the district accused Dock of misappropriating a significant amount of money from the school’s activity fund, which had contained more than $50,000. That was exactly the sort of problem the auditors had foreseen.
The district fired Dock, who told The Star recently the money was spent on approved activities and supplies. Much of the money, she said, went to school and college trips, a band trip and a trip to Barack Obama’s inauguration.
Earlier this year the school district asked that the state education department dismiss the case and that it be allowed to pursue its complaint through the Missouri attorney general’s office.
Dock remains certified with the state while the attorney general’s office investigates. She has since been hired as a principal for the Afrikan Centered Education Collegium Campus, which has a contract with the district to run three schools and makes independent hiring decisions.
The 2008 and 2009 audits also found the district still was not providing all the Head Start services paid for with federal dollars. Checks of 25 students each year found that most did not get the two home visits or teacher conferences prescribed by Head Start.
The continuing failures drew a financial sting last year.
Federal dollars for the program come through the Mid-America Regional Council. Jim Caccamo, director of the council’s early learning department, said the district made improvements but then faltered.
In May 2009, Caccamo withheld funding for three weeks. He restored it after the district produced a plan that he said delivered the visits and conferences during the school year that just ended.
The 2009 audit report, the most recent one in district hands, showed seven other repeat offenses among 17 problems raised.
“It is troubling to see this much stuff not being done properly,” said Ray Daniels, a retired Kansas City, Kan., school superintendent who reviewed the Missouri district’s track record at The Star’s request. “But it really becomes troubling when it becomes multiple-year situations.”
Michael Casserly, executive director of the Council of the Great City Schools, acknowledged that urban districts faced more challenges than some suburban and rural school districts.
“The possibility for error is greater, but the standard to which we should be held should be the same,” he said. “The trick is not that you have audit findings. The issue is whether the district has mechanisms in place to address the findings.”
Lee-Gwin said that to address old problems and head off others, she has spent her first year broadening training within the finance department, opening communication between departments and setting up monitoring systems.
Employees have her cell phone number so she can clear up questions when they arise. She shows up to personally deliver the message of how business will be done. She led the financial training of school principals this month.
“It makes a difference coming from me than if it came from somebody else.”
Some issues aren’t entirely resolved.
Head Start visits, Lee-Gwin said, remain difficult to schedule because teachers don’t have a visit day, spending five days a week in classrooms.
Half the district’s schools, mostly its high schools and larger elementary schools, will start the new term with software to track student activity funds, as well as bookkeepers to shepherd dollars raised and spent at the schools.
Budgets, however, dictate that other schools will have to wait until next year.
The district also has missed past opportunities to tap resources at hand.
In recent years, the district has been unable to collect under a federal program, called E-Rate, that supports technology spending by reimbursing districts that qualify.
Kansas City lost access in 2006 after federal investigators levied claims of bid-rigging, false claims and fraud. The district was able to settle the case, and no criminal charges emerged.
It has continued to spend money on technology and has requested more than $2 million in reimbursements. But Universal Service Administrative Co., which administers E-Rate, has been auditing the district’s requests and weighing whether to start reimbursements again.
In an effort to avoid a negative audit, the district five months ago gave up trying to collect $1.5 million in previously approved but uncollected E-Rate dollars. It also devotes one employee’s time to its E-Rate activity.
The district expects a clean audit that, by next summer, should unlock more than $2 million in pending funding requests and deliver $1.4 million in new requests it expects to make this school year. Budgeting problems also raise questions about the district’s use of resources.
Auditors noted that the district’s first budget for the 2008 school year inexplicably included what they called “negative expenditures.” In other words, after spending money from an account, it was shown to somehow hold more.
And its 2008 budget underestimated revenues by 5 percent, more than any of 43 districts ranked by the Council of the Great City Schools that year. Some districts overestimated revenues, which can cause problems when dollars budgeted don’t arrive.
A big budgeting miss the other direction raises the risk that the district won’t effectively spend that money when it comes in, or will miss the chance to direct those revenues to help kids learn.
Having money hasn’t always meant the district spent it.
For example, Kansas City fared poorly compared with other urban districts in rankings by the Council of the Great City Schools. Council findings showed Kansas City left 30 percent of its grants unspent in 2008, the lowest ranking among 35 districts that year. It left 19 percent unspent in 2007.
Kansas City was one of 13 area districts to tap a three-year math and science grant from the Ewing Marion Kauffman Foundation. Its approved plan laid out $1.5 million in spending through June 2009 that would be covered by Kauffman.
But the district didn’t meet its own schedule and ultimately was able to collect only a third of the grant. Failing to spend grant money can threaten future grants if givers conclude the district doesn’t need or doesn’t know how to use their money.
The district shows up in few of the many other financial comparisons the council does because it doesn’t provide the needed data. Casserly, of the Council of the Great City Schools, argues the benchmarking efforts over the years could have saved a lot of money, easing the current bind.
“They never did anything that indicated that they cared,” Casserly said.
The district is now sending substantially more data to the Council of the Great City Schools. Lee-Gwin said she also tracked ideas that other districts in the group generate.
New monthly spending reviews ensure that district programs and departments stay on budget, Lee-Gwin said, adding that grant money is being spent. One new report tracks overtime and has allowed the district to curb the $26,000 extra that security was spending each month.
Many eyes are watching the district attempt its financial reformation.
It is being audited not only under the federal E-Rate program, but also by Missouri Auditor Susan Montee’s office, by its independent auditing firm of McGladrey & Pullen, and by federal auditors examining stimulus dollars.
Many critics of the district say they like what they see of the efforts to change, not only from the administration but also from the board. The board, former member Burnett said, has transformed from a collection of separate interests to a group that sees the district as a whole — understanding that actions affecting one part of the district affect everyone.
Lee-Gwin said the district was benefiting as opinions change.
Last year, for example, the district raised $17.6 million under a federal bond program that pays investors mostly with federal tax credits and a little bit of interest from school districts. A second round, worth $16.2 million, is in the works, and this time the district doesn’t expect to hire underwriters to sell its bonds. A cheaper financial adviser can do the job.
“Last year we had to really look for a buyer (for district bonds). People were not interested in Kansas City. And this year there’s much more interest,” Lee-Gwin said.
The most important verdict will come from Kansas City parents and taxpayers. Most of the changes under way are aimed at them, to get them to trust the Kansas City School District with their children and their money.
They will be watching next week when buses arrive, school bells ring, teachers take roll and textbooks open. Lee-Gwin said each aspect of the opening of schools would become a credibility test for a district that wanted to win voters’ support for the planned $100 million bond issue.
“If you can’t open school right, why should I give you more money?” Lee-Gwin said.
To reach Mark Davis, call 816-234-4372 or send e-mail to firstname.lastname@example.org. To reach Joe Robertson, call 816-234-4789 or send e-mail to email@example.com.