Financial woes continue as department of ed puts Stockton Unified on 'high-risk status'

Financial woes at Stockton's largest school district appear to continue.

In an Oct. 5 letter, California Department of Education (CDE) notified Stockton Unified School District, which serves nearly 40,000 students, that it has been placed on "high-risk status."

What does this mean for the district?

"The CDE's assessment of risk is used to determine the level of assistance or oversight that will be provided to a local educational agency in order to ensure compliance with state and federal requirements," said Scott Roark, public information officer for the state's education department.

This may include providing training and technical assistance and performing monitoring reviews, Roark added.

The decision came as a result of recent compliance concerns raised in an Assembly Bill 139 Extraordinary Audit Report issued in February. The AB 139 Report concluded there was sufficient evidence to demonstrate that fraud, misappropriation of funds and/or assets, or other illegal fiscal practices may have occurred.

"Specifically, Fiscal Crisis and Management Assistance Team (FCMAT) reported that SUSD manipulated bidding proposals to favor specific vendors, circumvented procurement and conflict of interest policies and procedures, failed to follow state and federal procurement requirements, did not provide all requested fiscal records, and failed to perform due diligence before awarding contracts or follow board policies," the letter states.

The findings identified in Stockton Unified's 2021-2022 annual independent audit and issues raised by San Joaquin County Office of Education (SJCOE) in the approval of Stockton Unified's 2023-2024 budget were also factors, according to the state's education department.

"The SUSD 2021-22 annual independent audit also identified material weakness in internal controls for financial statement reporting, material weakness in the internal control over and use of federal stimulus funds, and deficiencies in compliance of federal and state program requirements," the letter states.

The district's 2023-2024 budget was approved by the county office of education, but in the spring the office said it found "serious" technical budgeting concerns.

“Among our concerns is that the district has not acted on information given by our fiscal expert regarding accounting errors, which could have been incorporated into the Second Interim Budget Report,” Troy Brown, county superintendent of schools, said in an April 14 letter to Stockton Unified.

“Additionally, we are deeply concerned that the district does not have a comprehensive plan for how it will effectively use certain time-limited funds," Brown said in the same letter.

The county office of education also noted that Stockton Unified eliminated its expenditures for Social Security and Medicare taxes in its multi-year projections, understating spending.

Stockton Unified has been plagued by financial problems for the past several years. The district is projected to have at least a $30 million deficit by 2024, has been warned that it is at risk of insolvency, and is at the center of a multi-agency investigation with the FBI and the U.S. Attorney's Office.

CDE believes Stockton Unified's lack of a permanent and qualified chief business official is a contributing factor in the district's ongoing financial problems. Stockton Unified has been without a permanent chief business official since Marcus Battle resigned in August 2022. Joann Juarez has been filling the interim role since Battle's departure.

Juarez submitted a resignation letter — in which she accused Board President AngelAnn Flores of “criminal” behavior — in April with the intent of returning to her previous position as budget manager on July 1. However, she has not stepped down from her interim role and it's unclear when the district plans to fill the CBO position permanently.

As a result of the high-risk designation, the state's education department has placed seven "conditions" on Stockton Unified to address some of the district's financial concerns, including the following:

• Stockton Unified must work with CDE and SJCOE and must resolve all remaining findings and corrective actions included within the audit reports and related letters from CDE and SJCOE.

• SJCOE must remove its lack of going concern determination of the district.

• Stockton Unified must hire a permanent and qualified chief business officer.

• The district must submit an annual independent audit to CDE without material findings.

• The district must cooperate with any additional federal or state oversight or monitoring, including fiscal monitoring, which will be conducted annually until it can demonstrate two consecutive reviews without material findings.

• Stockton Unified must meet all required state and federal reporting requirements, including quarterly and annual federal stimulus reporting.

• CDE reserves the right to take any other enforcement actions consistent with federal and state laws and regulations, including any of the remedies for noncompliance.

"CDE is working with Stockton Unified School District to ensure they properly implement internal controls and accomplish each of the items listed in the letter," Roark said.

The district will "remain on high-risk status until it resolves each of the identified specific conditions to CDE's reasonable satisfaction," according to the letter.

"A fiscal monitoring review will be conducted of SUSD in fiscal years 2023-24 and 2024-25, and SUSD's next annual independent audit is due to CDE in December 2023," Roark said.

Record reporter Hannah Workman covers news in Stockton and San Joaquin County. She can be reached at hworkman@recordnet.com or on Twitter @byhannahworkman. Support local news, subscribe to The Stockton Record at https://www.recordnet.com/subscribenow.

This article originally appeared on The Record: Stockton Unified on 'high-risk status,' department of ed says