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State Takeover Seen for Cash-Short District in Calif.

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Richmond, Calif.--A deepening fiscal crisis confronting the school system in this Bay Area industrial city is seen here as leading to the first direct state takeover of a district in California history.

Such a move, observers say, could curtail or end the district's widely touted choice program, which sought to rapidly transform the schools by creating special programs in every building and allowing parents to send their children to any school in the district. (See Education Week, Dec. 13, 1989.)

In response to the budget problems, which have been described as the most severe ever faced by a California district, local lawmakers are drafting legislation to provide at least $25 million in state loans needed by the district to avoid bankruptcy by the end of this school year.

In return for the bailout, the proposed measure also would give a state-appointed "super trustee" full authority to operate the district.

Although details of the takeover have yet to be worked out, virtually all parties, including the local school board, acknowledge that such a step is the district's best option.

The district "is in such a deep hole, it's going to take a miracle to recover," said Fred Stewart, a trustee appointed by the state last summer when local officials obtained their first bailout loan from the legislature.

Despite such broad support and the possibility of concessions from local officials and union leaders, however, the bailout legislation could face considerable resistance among state lawmakers, who will be struggling with a deficit currently estimated at $6 billion.

The seeds of Richmond's current budget woes had already been sown before Superintendent Walter Marks arrived in 1987 with his school-choice plan, which he promised would bring dramatic improvements.

The district has operated at a deficit in five of the past six years, and only revenues from the first year of the state lottery prevented an unbroken flow of red ink.

But the changes Mr. Marks proposed, including the choice plan, were expensive. To balance its budget during the 1987-88 school year, the district resorted to selling $10 million in "certificates of participation" backed by its property.

Meanwhile, the choice program was drawing national recognition, leading then-Secretary of Education Lauro F. Cavazos to hold a regional hearing on the issue in Richmond late in 1989.

By that time, the district's budget problems were drawing increased scrutiny from state and county education officials. But local officials insisted that a variety of state and federal grants, as well as the sale of unused property, would enable them to balance the budget.

The anticipated revenues never materialized, however, forcing the district to request a $14-million loan from the state, which former Gov. George Deukmejian cut to $9.5 million after it was approved by the legislature.

As a condition for approving the loan, state lawmakers required the appointment of a trustee with powers to veto any spending by the district. In addition, they ordered a management study and an audit of the district's finances.

Those examinations revealed that the district's problems were much worse than expected. In September, district officials estimated that their deficit for the current year would be between $3 million and $12 million. Current estimates place the deficit at no less than $25.5 million, or almost 20 percent of the district's $130-million budget.

The studies also criticized the district's management and budget practices, pinpointing in particular a lack of financial controls and a haphazard chain of command.

And a separate state audit of voluntary-desegregation monies received by the district--the major source of funding for the choice plan--revealed that roughly half of the $9 million the district received for the current school year has been misallocated and must be repaid.

Under increasing pressure from state officials, school-board members last month forced Mr. Marks to resign after buying out the 2 years remaining on his contract.

The buyout angered officials of the United Teachers of Richmond and the California Teachers Associel10lation, who called for a grand jury to determine if the superintendent, school-board members, or other administrators had violated any laws.

Union leaders have long been critical of Richmond's choice program, which they complain was implemented in a top-down manner without adequate input from teachers.

But the budget crisis has further soured the atmosphere, leading the u.t.r. membership last month to adopt a resolution of "no confidence'' in the school board and administration and to endorse a state takeover.

The board precipitated the action by adopting a financial-recovery plan that would cut hundreds of employees next year and amend or eliminate many provisions of the district's collective-bargaining agreement.

Board members justified their move by pointing to the management study, which concluded that some of the contract provisions were more generous than those in comparable districts and would inhibit the district's recovery effort.

But union leaders maintain that the problems have been caused by burgeoning administrative expenses and the costly innovations introduced in the district.

Mr. Marks "never came to grips with our revenue limitations," said Ernie Ciarrocchi, executive director of the u.t.r. "He should have adjusted his dreams accordingly."

Mr. Marks was unavailable for comment.

School officials throughout Califor4nia are closely following the Richmond case for signs of the state approach to the growing number of districts that face financial problems.

While other districts have received temporary loans from the state, none has ever needed to come back a year later for more money.

And legislators in recent years have tried to discourage districts from seeking emergency aid by stiffening the political cost of a bailout.

Two years ago, an emergency-loan package for Oakland granted a state-appointed trustee only advisory powers, even though some board members and school employees had been implicated in criminal acts. (See Education Week, Jan. 10, 1990.)

But the Richmond trusteeship, created a year later, was given more power than any previous such post.

School and union officials agree that lawmakers are unlikely to give the district another loan without demanding a complete state takeover.

Legislators also are expected to consider two other issues that could set a precedent for future takeovers: labor relations and financial terms.

State and local union officials express concern that there will be a push in the legislature to give the state trustee powers to abrogate collective-bargaining agreements.

Observers also said that lawmakers will have to address the problem of how a district with a massive debt can continue to educate its students.

To balance the budget next year, the district would have to cut $25 million from projected spending needs. On top of that, if the state agrees to provide a loan, the district's long-term debt would total nearly $60 million.

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