Background:

After experiencing severe financial problems, Vader School District No. 18 (Vader) was dissolved and annexed to Castle Rock School District No. 401 in 2007. Prior to that, it had been almost 25 years since the last school consolidation in Washington took place.

In November of 2009, Jon Molohon, Educational Service District (ESD) 113 Assistant Superintendent for Fiscal Services, ESD Fiscal Officer, and the Administrator of Vader Binding Conditions, published a report about the process, The Vader School District Closing In Retrospect. Primarily, the report identifies and makes recommendations to address the lack of a clear legal framework and process for dissolving a school district for financial reasons, including the lack of clear legal authority for the Office of the Superintendent of Public Instruction (OSPI) or an ESD Regional Committee to determine and manage the myriad financial and practical issues that such an event presents.

Current Washington Law: School District Dissolution.

Current laws emphasize voluntary and negotiated reorganization of school districts:

Boundary changes and consolidations can be initiated by agreement between the school boards of the affected districts, or by a petition from one board or a group of citizens.
If a petitioned district does not agree with the proposed change, a Regional Committee appointed by the ESD has decision-making authority.
Consolidations and transfers of territory that affect 10 percent or more of the student population require voter approval.
Regional Committee decisions can be appealed.

After a reorganization, the Regional Committee is charged with the reallocation of assets and liabilities, including levies and bonded indebtedness. A new district can result from a consolidation or reorganization of all, or parts of two or more, current districts, but not a division of a single current district into separate ones.

There are only two references to "dissolution" of a district in statute:

School district boundaries may be altered by the dissolution and annexation to an existing district of a part or all of another district.
A Regional Committee is required to dissolve any school district that, in the prior year:
- has an annual enrollment of fewer than five K-8 students; or
- has not made a reasonable effort to provide the minimum 180 day school year.

No statutes provide for dissolution of a school district in any other fashion or for any other reason. The dissolution of Vader occurred under the second of the two laws referenced above, but only because the district agreed not to make up some days missed in the prior year due to an emergency closure in order to fall under the provisions of this statute.

Current Washington Law & Practice: School District Financial Problems.

School districts must annually submit a budget to the OSPI where expected expenditures for the upcoming school year do not exceed expected revenues from all sources. If a school district cannot submit a balanced budget, it can petition OSPI to be allowed to include revenues from a future school year (in other words, borrow against future state apportionment payments) only if the district agrees to certain binding conditions that are intended to improve the district's financial condition.

The ESD Financial Officer is assigned to be the administrator of the binding conditions. This role has limited authority and primarily serves as a consultant to the school district for how to improve their financial situation. The presence of a third party, even if somewhat symbolic, acts as a motivating factor for districts and their boards. According to a Joint Legislative Audit & Review Committee analysis, there have been 12 districts in binding conditions at some point over the last 10 years. Most resolve their finances in one to two years. All but two of these districts have had fewer than 2,000 students.

Report Reommendations.

The recommendations made in the Vader report can be summarized as follows:

Authorize the OSPI or a school district to initiate dissolution of a district due to financial insolvency and authorize the Regional Committee to make the determination and oversee the dissolution.
Address various financial and legal issues associated with dissolution, including determining what is the appropriate length of time to permit a district to solve its own problems without outside intervention.
Make technical amendments to other laws dealing with district reorganization, including but not limited to dissolution of a district.

Summary of Bill:

The SBE is tasked with analyzing options and making recommendations for a clear legal framework and process for dissolution of a school district on the basis of financial insolvency. The analysis must include:

a definition of financial insolvency;
a time frame, criteria, and process for initiating dissolution of a district;
roles and responsibilities of various entities, including the OSPI, ESDs, and regional committees on school district organization; and
recommendations with respect to various issues such as terminating staff contracts, liquidation of liabilities, and dealing with bonded indebtedness.

In conducting the analysis, the SBE must consult with individuals with legal and financial expertise. The SBE may recommend a financial early warning system for consistent, early identification of school districts with potential fiscal difficulties. The recommendations must address amendments to current law as well as propose new laws as necessary.

The final report and recommendations to the Governor and the fiscal committees of the Legislature are due January 5, 2012.