Law & Courts

Newark Sues State, District Over Losses

By Karla Scoon Reid — February 14, 2001 6 min read

The city of Newark, N.J., has taken its state-run public school system to court, alleging financial mismanagement, in what is believed to be the first lawsuit of its kind involving a state takeover of a district.

Mayor Sharpe James and the city, whose lawsuit also names the New Jersey education department, are seeking to determine who should be held accountable for a $73 million funding gap that they say prompted the district’s 1999 financial crisis. The city, which allocates about $80 million annually to the district, filed the suit in state Superior Court in Essex County last month.

As the legal challenge takes shape, five independent accounting firms, state auditors, and the state attorney general’s office are conducting their own reviews of the district’s books. The findings from some of those reviews have put the state at odds with its own former employees over the source of the 42,000-student district’s money troubles.

Current state education officials blame shoddy bookkeeping and overspending for Newark’s funding crunch. But a former New Jersey education commissioner and the former state-appointed superintendent of the district say the state simply failed to give the Newark schools enough money to run court-mandated improvement programs.

 Marion A. Bolden

The multimillion-dollar argument has consumed the district’s administration, as officials try to remedy the system’s financial ills, implement much-needed educational changes, and move forward with a recently approved $1.6 billion construction and renovation plan.

“It’s wearing on those of us who have to work here,” said Marion A. Bolden, who took over as the state-appointed superintendent in 1999. “It has to be put in order or we can’t move forward.”

A New Twist

Meanwhile, regardless of who or what may be to blame for the financial fumble in Newark, critics of the takeover have been quick to claim that the situation bolsters their position.

“We certainly would like to prove the state takeover was a complete failure,” said Joseph Del Grosso, the president of the Newark Teachers Union, an affiliate of the American Federation of Teachers.

Leo Klagholz

"[The state] has already been proven guilty of at least one thing—bad management. How many children lost educational opportunities because of it?”

In 1995, Newark became the third New Jersey district, after Jersey City and Paterson, to be seized by the state under an “academic bankruptcy” law after a long history of low student achievement and mismanagement. While takeover opponents have criticized the state’s management, state officials say the district’s test-score gains and facility improvements are signs of success.

Nationwide, state takeovers of school districts have met with mixed results, said Todd Ziebarth, a policy analyst for the Denver-based Education Commission of the States.

Since the late 1980s, at least 40 districts have experienced state or city intervention, in states from Alabama to California, according to an ECS report.

States often take control of districts to try to correct budget problems, Mr. Ziebarth noted, which makes Newark’s financial difficulties under state leadership stand out.

The city’s lawsuit also breaks new ground in state takeovers because most cities have sought court intervention to wrest control of their schools back from the state, Mr. Ziebarth said, not to challenge how the state has managed them.

The lawsuit also names a mix of current and former education officials, including Beverly L. Hall, Newark’s first state-appointed superintendent, who resigned in 1999 to run Atlanta’s public schools; the current state education commissioner, David C. Hespe, who is resigning from his post next month; and Superintendent Bolden.

A spokesman for Mr. Hespe declined to comment on the lawsuit.

But Ms. Bolden said that many of the concerns raised in the lawsuit had been addressed by the audits or by corrective action taken after the financial reviews were completed. Still, she said, she understands the city’s motivation.

“The city, with their lawsuit, is saying we represent the children of Newark and want to ensure they are not victimized by what happened,” Ms. Bolden said.

Ms. Hall said last week that she had not read the lawsuit. She suggested, however, that takeover critics were attempting unfairly to discredit her leadership.

“When you institute an aggressive reform agenda,” the Atlanta superintendent said, “people who benefited from the status quo get mad.”

For his part, Mr. Del Grosso said the teachers’ union would try to join the lawsuit as a plaintiff. “I really believe the more people involved in the investigation, there will be less of a chance for a coverup,” he said.

District ‘Shortchanged’?

Still unclear is what caused or who was responsible for the financial bind that paralyzed New Jersey’s largest district during the 1999-2000 school year.

Leo Klagholz, who served as New Jersey’s education commissioner from 1994 until 1999, said Newark had two problems: a budget deficit and inadequate record keeping. The two issues are not directly related, maintained Mr. Klagholz, who is now a professor of education policy at Richard Stockton College in Pomona, N.J.

While the district’s declining enrollment meant that it qualified for fewer state dollars, a court-mandated resolution of New Jersey’s long-running school funding lawsuit required Newark and other districts to adopt costly programs, such as expanded preschool classes. Districts that could not afford those programs with their existing budgets asked for more money from the state to fill the void.

Mr. Klagholz and Ms. Hall say that when they were leaving their positions in 1999, the district asked the state for $104 million to run improvement programs mandated by the state supreme court. Under Commissioner Hespe’s leadership, the state education department gave the Newark schools about $14 million.

“I think the district got shortchanged in funding,” Mr. Klagholz said.

Robert A. DeSando, Mr. Hespe’s spokesman, said the district couldn’t justify its expensive request, which prompted state officials to take a closer look at Newark’s finances. State officials and auditors found that the district couldn’t produce monthly financial statements; one audit, by PriceWaterhouseCoopers, couldn’t account for $25 million.

“The district had no idea what it was spending from day to day, month to month, and, it got to a point, from year to year,” Mr. DeSando said, adding that the state eventually bailed the district out. “It wound up spending more money than it was authorized to spend, putting them in a deficit situation.”

While the education department is forwarding audit reports to the attorney general’s office for review, Mr. DeSando said the state has not found any evidence that money was misspent.

In an interview last week, Ms. Hall, citing previous state audits that contained no mention of funding shortfalls, said: “I take issue with the whole notion that there was a budget deficit during my tenure.”

The district, which had to freeze spending for a short time last year, is now operating with what Ms. Bolden described as a “minimal” $616 million budget. She said it is putting a computerized financial system with checks and balances in place to ensure money is being spent appropriately.

“It’s particularly difficult in a city with a reputation of mismanagement to ask for the funds that you feel youngsters deserve,” she said.

A version of this article appeared in the February 14, 2001 edition of Education Week as Newark Sues State, District Over Losses

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