The $6 Million Blunder
Elena Kadvany / Palo Alto Weekly
In early August, as Palo Alto Unified administrators prepared for the start of a new school year, an employee walked into the school district office at 25 Churchill Ave. and asked a simple question: "Where's my raise?"
District staff explained to the employee that a 3 percent raise originally promised to teachers and classified staff this school year was no longer happening. The multimillion dollar budget shortfall the district has been grappling with since summer 2016 — when staff members realized they had misestimated property tax revenue to the tune of $3.7 million — had triggered a "safety valve" provision in the unions' contracts that eliminated the salary increase, sources say the employee was told.
Within days, however, district officials discovered an unfathomable screw-up: No one formally notified the unions that the district planned to exercise its option to reopen negotiations, as required by the contracts, with the intent of cancelling the raises.
For the second time in less than a year, an avoidable mistake by top Palo Alto school district administrators will cost taxpayers millions of dollars and force more budget cuts, while employees will receive raises and bonuses that the Board of Education voted months ago to eliminate.
Although Superintendent Max McGee and the unions sought to downplay the issue this week by describing the problem as a "misunderstanding" due to "confusion" over the terms of the union contracts, the mistake was actually shockingly straight-forward: Administrators simply failed to provide the required notification to the unions that the district was invoking its option to reopen negotiations due to budget conditions by a March 15, 2017 deadline.
Under the three-year union contracts, if property tax revenue comes in at more or less than 1.5 percent than the amount the district budgeted for in 2016-17 — as it did, at 5.34 percent compared to the district's projection of 8.67 percent — "each party has the option to reopen negotiations on the three percent (3%) increase to the teachers' salary schedule for 2017-18 by March 15, 2017."
The mistake will cost the district $4.4 million in raises for unionized teachers and non-teaching employees, plus almost certainly another $1.5 million for employee bonuses at the end of the school year — an additional contract provision that the board had intended to suspend.
For more than six months, when it was obvious during budget talks that the school board was committed to cancelling the final year of raises, the unions' leadership sat back and said nothing as the March deadline passed, even though they regularly attend board meetings.
The unions similarly made no comments as the board adopted in June its 2017-18 budget, which contains no salary increases and more than $4.37 million in budget cuts to balance the budget. (The unions had a financial motivation not to comment: The board, by being unaware that the contracts had not been renegotiated, unwittingly virtually guaranteed the payment of $1.5 million in bonuses to employees at the end of this school year by adopting a projection so conservative that actual property-tax revenues this year would likely exceed budget by much more than the trigger 1.5 percent, as is turning out to be the case based on early county tax estimates.)
It was not until early August, when the union member went to the payroll office, that McGee first became aware that the district had not notified the union as required, he said.
In interviews with the Weekly, McGee repeatedly characterized the error as a "misinterpretation" and "misunderstanding," but he would not clarify what he meant or whose misunderstanding it had been.
He said that he assumed that references to reopening negotiations and eliminating the third year of raises at numerous public meetings on the budget over the course of the last school year served as sufficient notice to the unions.
"My assumption and the board's assumption was that it was killed and the union's assumption was, 'It's one thing to say "reopening" but if it's not a formal thing in writing....' It was just due to a misunderstanding and misinterpretation of the contract language," he said.
All five board members, however, told the Weekly they were under no such assumption; They said they recognized the need for a formal notification to the unions by district management.
McGee said he is frustrated with himself for not paying closer to attention to contracts that had been in place for two years.
McGee's statement that he did not believe notice to the union was necessary was not shared by the district's Chief Budget Officer Cathy Mak, who according to multiple district sources, including McGee, reminded Scott Bowers, then assistant superintendent for human resources, prior to the March 15 deadline to notify the unions. McGee said he was unaware of the reminder at the time and only learned about it a few days ago.
Mak declined to answer any questions about the issue, citing the confidentiality of union negotiations. She refused to acknowledge she was aware of the deadline or that she reminded Bowers about it. Nor would she state whether it was discussed at senior management meetings. (The Weekly has made a Public Records Act request for her emails to Bowers, but the district has yet to respond.)
Bowers, who retired at the end of the school year, told the Weekly that he had "a number of conversations" with Mak about the budget, mostly about reductions and staff — but not the March 15 deadline. He said he did not discuss the deadline or compensation with McGee.
Bowers said he "had no idea there were any issues" with the contract when he retired in June, and assumed that any compensation changes would be negotiated "as we normally did" in August, after the district receives updated property tax projections from the county.
Bowers said he believed conversations he had with the unions at the beginning of the school year about how the budget shortfall triggered the reopening of the contracts constituted notice of the district's intent to do so.
"In hindsight, those conversations should have been followed up with a formal letter to each union to eliminate any possibility for misunderstanding or misinterpreting the district's interest in reopening the compensation article of the contract," he wrote in an email Thursday afternoon.
View a timeline of how the district failed to reopen union contract negotiations here.
A school board unaware
McGee first publicly disclosed the mistake in a weekly message posted on the district website last Friday. Below paragraphs on weighted grading and the previous week's board meeting was a short paragraph that said early property tax estimates (for the 2017-18 fiscal year) from the Santa Clara County Assessor's Office have come in higher than the district's conservative budget projection of 3.73 percent and that the additional $4.4 million would be used to pay for raises for teachers and classified staff. District administrators and managers, including principals, would not be getting raises and will no longer automatically receive the same salary increases as unionized staff, McGee wrote.
Later that day, after inquiries by the Weekly, McGee updated his message, adding two sentences:
"While we would have preferred to have more flexibility if we reopened the 2017-18 contract, due to some misunderstanding and misinterpretation of contract language, we missed this opportunity," he wrote. "This caused some confusion, but the union and district leadership worked through it and we are moving forward."
Board President Terry Godfrey told the Weekly that she was "disappointed" that there was confusion between the district and its unions. She had assumed that there would be no raises this year given that's what was built into the adopted budget.
She was unaware, she said, that the district's lead negotiator at the time, Bowers, had not formally reopened negotiations. She said she did not check in nor ask for an update about how negotiations were proceeding between the March deadline and the board's approval of the budget in June.
Godfrey said her understanding, based on what she learned from McGee, was that Bowers "thought" he had provided notice but there is no documentation of him doing so.
"'I thought I had done it or I had conversations about it' isn't good enough for trying to reopen a contract that is closed," she said.
While Bowers was responsible for the district's adherence to the contracts, McGee also holds responsibility as his manager, Godfrey said.
"While he (McGee) doesn't sit at the negotiating table, I think he's the one closest to the negotiations and responsible for keeping us on track," she said.
Vice President Ken Dauber called it a "serious management failure."
"My assumption as a board member was that district staff was correctly handling this with the union, not that our conversations in board meetings constituted notice in the contract," he said.
Trustee Todd Collins, who centered his 2016 election campaign around the district's response to the budget shortfall, agreed. He has requested the board schedule a closed-session evaluation of the superintendent.
Collins said the failure to reopen negotiations is an "egregious," "self-inflicted error" with broad-reaching implications, financial and otherwise, for the district. He said he had assumed that "the staff had done their job, as they do in every aspect of negotiating the contract, of doing what they needed to do to trigger the out clause related to the 3 percent raise."
"There is no more important date on the calendar from a fiscal management point of view than that date," he said of the March 15 deadline. "This is something that the senior manager in the organization has to be paying close attention to and clearly did not."
"I don't call that a misunderstanding," he said. "I call that a mistake."
Trustee Jennifer DiBrienza said the contract was "clear" and that "the district has to be more proactive in dealing with changes in circumstance."
Trustee Melissa Baten Caswell said she assumed there wouldn't be enough property tax growth to pay the 3 percent raise and deferred further questions to Godfrey and McGee.
McGee would not affirmatively state that he was unaware of the March 15 deadline. He said he "wasn't at the bargaining table" and didn't deal with the contract on a daily basis.
"Obviously if I were aware of it on March 15, we would have said something," McGee said.
He said the district tried to find documentation of any notice to reopen negotiations, and neither Karen Hendricks, the new assistant superintendent for human resources, "nor anyone else currently employed here could find anything definitive."
Union representatives, who would not agree to be interviewed by the Weekly but instead provided statements by email, said their unions were unaware of any dispute about the contract until last month.
Teri Baldwin, president of the Palo Alto Educators Association (PAEA) said that the teachers union "didn't know there was an issue until August when we returned to work."
Classified School Employee Association (CSEA) President Meb Steiner said CSEA "raised the issue when we became aware of it," also in August.
Baldwin said that "complicating matters," there wasn't an adopted budget until late June, after the school year ended. The board, however, approves the budget around that time every year, preceded by many public budget discussions that union leaders attend. What's more, according to Mak, the first draft of the 2017-18 budget that included no raises for employees was presented publicly on Aug. 23, 2016.
Nonetheless, Baldwin said, "We did not see that adopted budget" -- without explaining why.
On Aug. 14, McGee met with Steiner and Baldwin, he said. The same day, according to Hendricks, the classified union filed a formal grievance against the district but withdrew it the following week "upon working through the situation in a collaborative process with the district," Steiner wrote in an email to the Weekly.
"There was some confusion about the contract language; we were brought into the discussion and were able to work out things out," Baldwin said in a statement on behalf of the PAEA executive board. "We appreciate the collaborative relationship we have with the district and the Board of Education."
She declined to elaborate on what "confusion" there was, stating that "it would be more appropriate for us to let the district office characterize the confusion if they wish to.
"Working through the issue ultimately required only a couple of conversations, and we are all satisfied with the process and results," she said.
A safety valve that wasn't
Before approving the district's first-ever multi-year union contracts last year, several board members and McGee hailed the foresight of a protective provision that would allow the district to eliminate one-time bonuses and to reopen negotiations if property tax revenue came in 1.5 percent lower than expected.
And when that exact situation came to pass in July 2016, they pointed with relief to what McGee called a "safety valve."
"What was key about this contract was that there are triggers that allow our district, our staff, our community to have a second conversation," then-trustee Camille Townsend said on July 27, 2016, when the board convened for a special meeting over the summer to discuss the surprise shortfall. "You try to build in conditions that make it safe for you. What this board did was build in conditions that would trigger a reassessment if the numbers weren't satisfactory."
At the same meeting, board President Heidi Emberling defended the multi-contract as a "bold" decision to change the way the district negotiates with its unions.
"Luckily we built in the trigger language if we were surprised by the numbers," she said in an interview with the Weekly at the time. "There was some forethought there in terms of planning."
In an interview that July, McGee told the Weekly that both sides talked about having the "safety valve language from the get go" of negotiating the new three-year contract.
"It was wise that we did and that's the reason it was there," he said.
Over the next 11 months, in more than a dozen meetings, board members and district staff sought input from the community and eventually cut $4.37 million from the district's $230 million budget to make up for the first year of the ongoing budget gap. The bulk of savings came from personnel changes and alternative revenue sources, but cuts closer to the classroom were also made, like a reduction in the per-student-allocation provided to each school.
Collins said this week he worried that, long-term, the district's failure to comply with the contract could damage its relationships with its employee unions.
"In addition to the straight-up financial consequence, it puts us in a more contentious relationship with our employees, who are essential to the district," he said. "As we go into negotiating a new contract, we'll have this event hanging over us."
Under the current contract, negotiations for a new agreement are set to start by the fall of the 2017-18 school year.
Godfrey said Tuesday that in light of the budget shortfall and the negotiations misstep, the district will likely return to its historic practice of negotiating annual contracts, with retroactive pay increases.
"Maybe keeping it simple is the better thing to do," she said. "We wanted to support our negotiator's and superintendent's desire to have a more predictable look at the future ... but it did not turn out to be that way."
Dauber, who cast the sole dissenting vote against the multi-year contract, said this "mistake" compounds a contract that "already gave unnecessarily high pay increases and neglected the financial health of the district."
"It's unfortunate that the increase in property taxes that we saw for this school year — that we won't be able to use that increase to protect against further cuts and to direct it to educational benefits for students and instead will be devoting it to further pay increases," Dauber said.
From Collins' perspective, the failure to reopen negotiations is indicative of a broader culture of non-compliance in the school district. He points to other issues, from the district's repeated violations of federal anti-discrimination law Title IX in sexual misconduct cases to a failure to post minutes of board meetings in a timely, regular manner, as evidence of this culture.
The school board will soon start the process of searching for a new superintendent to replace McGee, who plans to retire at the end of this school year. Collins' "most important criteria" for this person is a high level of attention to detail and compliance.
"I think one of the most important issues of the district is changing that culture. Having a culture has to start with a board and superintendent that focuses on getting the details right and on complying with laws, policies, regulations," he said. "Until we have that, we will continue to have these kind of mistakes."
The added bonus
In addition to the unbudgeted salary increases, the district will likely also end up paying teachers and classified staff a 2 percent bonus at the end of the school year as a result of ultra-conservative budget projections. Under the contract, if the actual property tax received for the 2017-18 school year is greater than budgeted for by 1.5 percent or more, a 1 percent automatic bonus will be increased to 2 percent.
Early estimates from the county provided to the district indicate property tax growth will be coming in well above that 1.5 percent threshold — 6.52 percent compared to 3.73 percent in the district budget. (Mak said she received this updated amount from the Santa Clara County Assessor's Office and the Controller's Office on Wednesday.)
While this is expected to provide the district with about $4.4 million more than budgeted, it will almost certainly result in the additional one percent bonus being paid at a cost of about $1.5 million — requiring further cuts to school programming or pulling from budget reserves.
The board will next discuss the budget at its Tuesday, Sept. 12, meeting.