STOCKTON, Calif. — In a three-page letter sent to Stockton Unified School District (SUSD) officials Thursday, the California Department of Education placed the district on "high-risk" status and outlined seven legally binding conditions that the district must now meet.
The designation follows an audit by the state's Fiscal Crisis Management Team (FCMAT) that found fraud, misappropriation of funds and other illegal fiscal practices.
The allegations in the FCMAT audit caused the San Joaquin County District Attorney's Office, the FBI and the U.S. Attorney's Office to launch an investigation into San Joaquin County's largest school district in April.
A representative with the District Attorney's office said Wednesday that the investigation is still active and ongoing.
In the letter to the district obtained by ABC10, the director of the Department of Education's Audits and Investigations Division, Alice Lee, said that the high-risk designation was made as a result of compliance concerns raised in the state audit, findings from the district's 2021-2022 independent audit, issues raised by the San Joaquin County Office of Education (SJCOE) when approving SUSD's 2023-2024 budget and the SJCOE's concerns over the district's budget outlook for the second consecutive year.
"SUSD’s 2023-24 budget was approved but SJCOE noted technical issues because it eliminated its expenditures for Social Security and Medicare taxes in its multi-year projections, understating spending," the letter said. "Furthermore, SJCOE's budget approval noted FCMAT identified SUSD as high risk and the district has not resolved several of the concerns identified in SJCOE’s October 2022 lack of going concern determination, which contributed to the redesignation in September 2023."
The district declined to comment on the high-risk status designation Wednesday noting that the letter did not raise any new concerns.
In its letter, the Department of Education placed seven conditions on the district effective Oct. 5.
The conditions include requiring the district to hire a permanent and qualified Chief Business Officer, work with the Department of Education and SJCOE to resolve all of its remaining findings and corrective actions from the audits, submit an annual independent audit without material findings and meet all state and federal reporting requirements.
In order to move out of the state's high-risk status, the SJCOE must also remove its "lack of going concern determination" of SUSD, the letter said.
Federal and state agencies will conduct annual fiscal monitoring of SUSD until the district can come out of two consecutive reviews without material findings.
The seventh condition said that the Department of Education can take any other enforcement actions within federal and state laws, including actions for noncompliance.
The state can modify or remove any of the seven special conditions at its discretion.
The district has been at the center of several high-profile investigations in recent years including at least three grand jury reports in addition to the state financial audit and criminal investigation.
One of the grand jury reports in 2022 predicted a budget shortfall of at least $30 million by the 2024-2025 fiscal year.
Another grand jury report in 2021 described the district's board of trustees at the time as in a state of "dissension, dismay and disarray" resulting in poor leadership.
A grand jury report in June and an independent consultant's report in 2022 were critical of the district's safety procedures.
SUSD's high-risk status will remain until it resolves each of the special conditions to the Department of Education's satisfaction. The Department of Education will review the high-risk status designation on an annual basis.
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