Board members had worried for months about the school system’s budget-busting spending. They had extracted promises from top administrators to reduce the payroll by $24 million – about 600 employees – over the summer.
And now there were grave new concerns: Chief Financial Officer Mark Smolarz had just reported the deficit was a whopping $30 million, greater than projected. Stringfield met with Shelia S. Dudley, director of human resources, and asked whether the necessary cuts had been made.
“She looked at me and said, ‘Sam, we have more employees than we did on July 1st,'” Stringfield recalled. “I feel like at that moment I knew what it meant. … This is the front door to disaster.”
His prediction proved accurate, as over the next few months the long-ignored financial problems brought the school system to the brink of insolvency.
Nearly 900 employees were laid off. Four of six top administrators were dismissed or left. Some students saw their class sizes grow and favorite programs eliminated.
Stringfield’s meeting with Dudley epitomized the core cause of the financial meltdown: a sweeping managerial failure that began at the top with former CEO Carmen V. Russo and permeated the ranks of senior school administrators.
All the backup controls failed as well. Documents obtained by The Sun through a public records request provide new evidence that school board members and state and city officials with oversight authority saw numerous danger signs a year ago.
In fact, some of the financial weaknesses had been widely reported for at least three years. And yet, no leader responded decisively until it was too late.
A recent audit of the school system’s fiscal management by the accounting firm Ernst and Young adds to the picture, as do interviews with top local and state school officials, including Smolarz’s first extensive comments on the problems since he quit in October 2003.
Among The Sun’s findings:
Partnership successes
“I am embarrassed walking around town,” former school board Vice Chairman C. William Struever said recently. “I feel devastated.”
Struever, who joined the board after the legislature created a city-state partnership to run the schools in 1997, had seen remarkable academic improvements. Students at once-failing elementary schools were posting test scores comparable to those of their suburban counterparts. A new technology-oriented high school was taking shape near the Inner Harbor.
Now the gains seem jeopardized.
“There isn’t a day that goes by that I don’t agonize about what I could have done differently,” said Struever.
What is particularly heartbreaking for Struever and other board members is that they knew full well the financial and management issues threatening the system by the fall of 2002.
Russo had gone on a spending spree with the board’s approval, even as a steep increase in state revenues was flattening out. The budget rose 28 percent in seven years, from $712 million in 1997 to $914 million in 2004.
Russo added teachers to reduce class size, put at least two academic coaches in each school and gave teachers a 5 percent pay increase for the second year in a row.
Meanwhile, two employees who might have kept a lid on spending – a budget director with more than a decade of experience, Howard L. Linaburg, and chief financial officer Henry Raymond – left abruptly in the fall of 2002.
School board member Kenneth Jones said the board erred in failing to give Raymond a two-year contract that would have protected him from retaliation.
“He was unwilling to do what he was being told to do,” Jones said. “He left because he was prevented from saying the emperor has no clothes.”
Their departures meant that Smolarz, the chief operating officer, had to take on the role of the chief financial officer until someone new could be found. But for the remainder of the school year, even as overspending threatened the budget, Russo did not hire a new CFO.
And as the school system’s financial infrastructure crumbled, Russo was planning her own departure. By September 2002 she was being considered for jobs in New York City and Florida. The public nature of her job candidacies kept the board and the staff on edge for months, wondering whether she was about to leave.
Primed for disaster
The school system was now primed for disaster.
In December, Smolarz and Russo struggled to provide accurate budget information. They initially predicted a deficit that had been growing since 2001 would increase by about $20 million by the end of the fiscal year on June 30, 2003. But within 24 hours they increased that projection to $31 million.
School officials had forgotten to include $10 million for a computer system to track payroll and employees. They had underestimated salaries by $7 million.
Russo ordered the immediate layoff of 396 temporary employees before Christmas and composed a plan to cut spending.
She and Smolarz advised the board to furlough hundreds of employees, lay off others, freeze some spending at schools, cut or reduce summer school, and put nonessential contracts on hold.
But the board rejected some significant cuts. Struever said that although the board knew layoffs would produce the most savings, members decided it would cause chaos in the middle of the school year. And the union, defending its contract with the system, rejected furloughs.
“Could we have done more to save money aggressively? I am sure,” Struever said.
Board members now acknowledge their mistake. By year’s end, the cumulative deficit would be substantially higher than it had ever been before.
With the problems so well publicized, state officials and the mayor, who had legal oversight of the system, also had the opportunity to respond. But by then everyone was used to seeing deficits. Without a requirement to balance the budget, the problems at the end of 2002 didn’t seem extraordinary.
“If you say it is OK to be in deficit, it is not a leap to say it is OK to be a little bit more in deficit,” said Peggy J. Watson, the city’s finance director and O’Malley’s representative on the school board finance committee.
The General Assembly didn’t lose faith, despite the deficits. Russo assured the public and legislators at hearings in Annapolis in early 2003 that she had a plan to put the system on sound financial footing.
Grasmick, the state superintendent, told the legislature in her annual report on city schools that the system had “stumbled.”
“On the financial front, poor planning and poor information combined to produce a major deficit,” she said. But she was optimistic about continued academic gains.
The legislature, which funds 60 percent of the city school budget, did nothing more. But some members of the school board were now alarmed. And the mayor was concerned enough to ask two business groups, the Greater Baltimore Committee and the President’s Roundtable, to review school finances and management.
Three board members – Struever, Stringfield and Jones – were particularly focused on the problems. Members of the finance committee, they met once a month with senior staff and worked on compiling next year’s budget so that spending and the deficit would be reduced. Joining them were representatives from the city and the state – Watson and John Lang, Grasmick’s designee from the state Board of Education – and some business executives.
Behind the scenes
Board members didn’t say in public what they angrily complained about in private. The board was kept informed of some of the fiscal deliberations of Russo’s staff, in part by being copied on extensive e-mails that Struever and Stringfield exchanged with Smolarz.
What they learned disturbed board members and foreshadowed the future crisis.
On April 26, 2003, Stringfield challenged Smolarz in an e-mail obtained by the newspaper:
“A very large frustration and public embarrassment of mine is that, to the best of my memory, every single financial projection we’ve put forward in the last two years has been substantially off, and always off in the same direction.
“We keep projecting more optimistically than reality later proves. For example, just a couple weeks ago, you estimated to me, blessedly in private, that our ’03 budget [deficit] would be $17 million. Here it’s $19.4. … Mark, why should I or the public believe this budget?
“If this budget deficit is in any danger at all of moving from $19.4 million to $20 million, I think we have to cut something else, right now. I don’t think we can or should sustain a $20 million deficit after all the promises we have made this year,” Stringfield said.
Board members were complaining regularly that they weren’t getting accurate information from the senior staff. And they weren’t.
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What they didn’t know – and wouldn’t until it was too late – was that the system’s deficit projections were horribly wrong.
According to videotapes and minutes of finance committee and board meetings, Russo’s staff was still maintaining in June, with just a few weeks left in the fiscal year, that the deficit would be $19 million that year. It would be $38 million.
Nor did staff tell Struever, for example, of the serious cash-flow problem then developing. While deficits could be carried from year to year, failure to meet payroll would shut down schools.
In March 2003, Smolarz called Watson, the city finance director, and told her he had a cash-flow problem and needed help from the city, according to letters released by the school system.
“At that point, I wasn’t thinking, ‘Oh, my gosh, they have this big cash-flow problem,'” Watson said in an interview, because the system had a record of being late and disorganized. She believed the cash-flow issue was short term and promised assistance.
She was a little suspicious, however. “I asked if Carmen or the board knew about this,” Watson said. Smolarz indicated Carmen Russo did. But when Watson called Struever, he was unaware, she said.
Smolarz said in a recent interview that he never deceived the board, and in fact there’s no evidence that he or Russo lied.
He said he gave his best estimate of what the deficit would be at the end of the school year. But he was hampered, he said, by having a small staff and by uncooperative administrators.
“They did budgets their way,” he said of some administrators.
Smolarz said the fact that his estimates might have been off wasn’t the issue – any large deficit was a problem. The right course, he said, would have been to cut expenditures immediately. He suggested that the board impose a two-day employee furlough the last two days of school in June, which would have saved $7 million.
But Struever says the board decided against it because members believed the union would have fought them in court.
Fed up with CEO
As frustrated as board members were with the information Smolarz put out, they were losing all patience with Russo.
By February, they had secretly given her a critical job evaluation, saying in part that the information they were getting was inadequate and that she had failed to attend to both academic and financial issues.
They privately asked her to leave, and she left in June.
In her last few months, Russo apparently didn’t write a single letter, e-mail or memo to the school board or Smolarz about finances. Grasmick and a number of North Avenue staff say that was her style.
“I think Carmen relieved herself of the responsibility by verbally communicating everything. She didn’t write anything down,” Grasmick said.
At board meetings Russo rarely spoke. She sat with the board rather than staff and didn’t defend them when they came under fire. That, too, reflected her style.
“I think she viewed herself as an external person,” Grasmick said. “She was going to meet the foundations and top people in the country and going to a lot of conferences. And later, she seemed gone so much. She didn’t have her hands on the pulse of what was happening.”
Struever reviewed her schedule and found there were many weeks in 2002 when she wasn’t there five days in a row.
As a result, the board often turned to Smolarz, who was increasingly struggling to keep up with a growing cash-flow crisis and to prepare a budget for the 2003-2004 school year. They voiced their most serious questions in private.
In an e-mail on May 27, Stringfield asked Smolarz: “You or somebody else seemed to imply that we are very, very close to bouncing checks. … How great is the risk that we could default on or bounce, (or however you say it), checks in July or other dates in FY 04?”
Smolarz replied the next day, “We do have cash flow issues.” He went on to say that delaying the start of a new payroll and employment tracking system would temporarily save money:
“That way, we should be able to manage but not without more yelling from our vendors.”
Meanwhile, signs of Smolarz’s difficulties abounded. He was six weeks late preparing the budget. Principals were complaining because they couldn’t hire teachers if they didn’t know their budgets.
Watson noticed at one meeting that a budget document was still warm from the copier when it reached her hands.
‘In over his head’
A Baltimore native who had attended city schools, Smolarz was viewed as driven, committed and honest. He wanted to make the schools work because this was his town, his legacy.
His responsibilities grew to include myriad problems, from where to locate a high school to how to deal with lead in school water fountains.
“I think Mark got way in over his head,” said school board President Patricia L. Welch. “More and more things were put on Mark’s plate. He took on three or four full-time roles.”
And yet the board, he said, decided in March to wait until July, when CEO Bonnie S. Copeland arrived, to hire a new CFO.
“They observed me drowning, and no one did anything,” Smolarz said. “They thought, well, Mark has always come through. Well, guess what? Mark drowned.”
Smolarz said he is not a “quitter” and stayed because he believed he could make it work.
“My regret was not being more forceful. I felt I was, but I guess I needed to take it to another level,” he said. “That probably meant standing up and saying to the board, Russo and the staff that ‘You guys aren’t getting it. This is serious.'”
Lack of authority
But in Russo’s administration and others before hers, the chief financial officer did not have authority to stop another senior administrator from spending money, according to a report by business groups released in July.
Smolarz had difficulty reaching consensus in an institution ruled by fiefdoms. Only a few weeks before the budget was to be voted on, Chief Academic Officer Cassandra Jones was still saying in public meetings that she needed $110 million more than Smolarz had allocated.
The result was predictable. Of the $32 million in overspending last year, $14 million went to special education, including paying contractors to provide speech pathologists, psychologists and teachers when the system didn’t have enough on staff.
Jones overspent her budget by $13 million, primarily on salaries and summer school, according to Rose Piedmont, the current chief financial officer.
Jones, who was dismissed last month, could not be reached for comment. But she has insisted that academic programs did not contribute to the deficit.
When the accounting firm of Ernst and Young was called in last fall to investigate, its report found that “no formal budget process has been developed, communicated or executed.” But some board members already knew that.
Struever and Kenneth Jones decided at the June 26 board meeting that they could not vote for a budget built on assumptions they believed were too optimistic.
“My fear is that the plan as presented here is not really executable,” Jones said at the meeting. “It’s not really executable in meeting our goals of reducing the deficit. … I think there are too many imponderables.”
The next week Russo left, and Bonnie S. Copeland, who had headed the nonprofit Fund for Educational Excellence in Baltimore, became interim CEO.
It was July, and school officials still hoped they could head off a crisis. While Russo was still CEO they had decided to shrink the payroll by 600 employees, to save $24 million.
Copeland said she was assured by Russo that about 80 people had been laid off – but Copeland saw some of them still working at the North Avenue headquarters. When she turned to staff to ask whether layoffs would be needed, they told her that retirements and normal turnover were sufficient.
“I was told that would be taken care of through attrition,” she said. “I am sorry I was so gullible.”
The staff hadn’t been shrinking, as Stringfield found out to his surprise in September in a meeting with Shelia Dudley, the human resources director.
Dudley disputes the criticism, saying she warned the board that attrition alone wouldn’t work. “No one gave me direction to lay off or otherwise release people over the summer.”
After meeting with Dudley, Stringfield immediately went to Copeland, who remembers even now how “red his face was.”
Copeland soon called former state Sen. Robert R. Neall, a financial expert at Johns Hopkins Hospital and Health Systems, to investigate the murky finances.
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About the same time, O’Malley said, he cornered school board member David Stone at a ribbon-cutting event and told him “in forceful terms” that “if you-all don’t correct this, this is going to bring both of us down,” a reference to the strain an insolvent system would put on the city budget.
He said he made sure that Copeland and Grasmick, also present, heard his anger.
By December the school system learned the cumulative deficit had grown to $58 million. By January Copeland had laid off 900 people. By March, just days before teacher paychecks would have begun bouncing, the city Board of Estimates agreed to lend the school system $42 million, avoiding a virtual state takeover.
More accountable
The city school system agreed to be more accountable to City Hall. It will submit monthly finance reports to Watson, and quarterly meetings will take place between Watson and school officials.
For the next two years, as the system pays back its loans and reduces the deficit, more spending cuts will be likely.
O’Malley and school board members hope the financial mismanagement will not harm a school system that had made significant progress in the early years of reform. They say they feel sorrow and regret over what has happened.
“I believe in the end the board has to take the rap for everything,” Struever said.
But O’Malley believes there is plenty of blame to be shared, saying, “I think we need to accept collective responsibility.”
He says he wishes he had demanded stricter accountability when Smolarz quietly asked for help last year with the looming cash-flow problem.
Grasmick said she wanted and asked for closer oversight of finances, but the governance structure did not give her legal authority to intervene.
As the school system tries to get back on track, those responsible for derailing it will face more questions. Grasmick appointed a three-person panel to investigate the causes of the financial crisis and report back in May.
The person many people most want to hear from is Russo. But the veteran educator once praised for her good work in reforming high schools in Baltimore has hired a lawyer and remained largely silent. She specifically declined to comment for this article.
Among her last words as CEO were two she wrote on a card she left for Copeland:
“Good Luck.”
<!– ART CREDITAMY DAVIS : SUN STAFF
ART CREDIT–> <!– CUTLINE TEXTMore than 500 protesters – students, parents, teachers and community activists – turned out in March to demand full funding of the city schools.
CUTLINE TEXT–> <!– ART CREDITELIZABETH MALBY : SUN STAFF
ART CREDIT–> <!– CUTLINE TEXTMembers of the Baltimore Teachers Union voted in February to reject a proposed pay cut. Many were angry because the proposal made no guarantees concerning layoffs.
CUTLINE TEXT–> <!– ART CREDITJED KIRSCHBAUM : SUN STAFF
ART CREDIT–> <!– CUTLINE TEXTIn December 2002, city schools CEO Carmen V. Russo consults with the system's chief operating officer, Mark Smolarz, during a City Council hearing on education.
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