Background: Currently, a school district that cannot submit a balanced annual budget to the Office of Superintendent of Public Instruction (OSPI) may request permission to borrow against future apportionment payments. In order to gain OSPI approval the district must agree to certain binding conditions that are intended to improve the district's financial condition. The fiscal officer for the Educational Service District (ESD) in which the school district is located is assigned to be the administrator of the binding conditions. The administrator has limited authority and primarily serves as a financial consultant to the school district. There have been 12 districts in binding conditions at some point over the last ten years. Most have resolved their finances in one to two years. All but two of these districts have had fewer than 2000 students.

The current laws that provide a process for changing school district boundaries emphasize voluntary and negotiated changes by school districts. A regional committee convened by the relevant ESD is authorized to make decisions when agreement among districts is not possible and to make necessary adjustments to assets and liabilities of affected districts when there is a reorganization. There are only two references to the dissolution of a school district:

District boundaries may be altered by the dissolution and annexation of part or all of another district; and
A regional committee must dissolve any school district that had an annual enrollment of fewer than five K-8 students in the prior year or has not made a reasonable effort to provide the minimum 180-day school year.

In 2007 the Vader School District became financially insolvent and was eventually dissolved and absorbed into the Castle Rock School District. 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 the statute.

In 2011 the Legislature directed OSPI to convene the ESDs to make recommendations for a clear legal framework and process for the dissolution of a school district on the basis of financial insolvency. The recommendations were submitted in December 2011, and include the legislative required analysis of termination of staff contracts, liquidation of liabilities, and dealing with bonded indebtedness; a definition of financially insolvent; the creation of a state level committee to assist in addressing financial matters, including enhanced financial oversight for districts in certain circumstances and to recommend dissolution of a financially insolvent school district following a specified process by the appropriate regional committee; and an appeals process.

Summary of Bill: A financially insolvent school district is defined as one that has been on binding conditions for two consecutive years and is unable to prepare a satisfactory financial plan; or is reasonably foreseeable and likely to have a deficit general fund balance within three years and is unable to prepare a satisfactory financial plan. A satisfactory financial plan is a plan approved by OSPI and ESD demonstrating that the district will have an adequate fund balance by the end of the plan period that relies on currently available revenue streams or revenue streams that the ESD determines are reasonably reliable.

OSPI must convene a Financial Oversight Committee (Oversight Committee) if a district is found to be financially insolvent or at the request of a financially insolvent district. The Oversight Committee is comprised of two representatives from OSPI, one representative from an ESD where the district is not located, and one nonvoting representative from the ESD where the district is located. The Oversight Committee must review the financial condition of a financially insolvent school district, hold a public hearing, and make a recommendation to OSPI to either place the district under enhanced financial monitoring, which may include specified types of actions; or dissolve the school district. A financially insolvent school district may file for bankruptcy only if recommended by the Oversight Committee.

A financially insolvent school district may be dissolved and annexed to one or more contiguous districts, in accordance with an agreement that has been approved by the Oversight Committee between the insolvent district and at least one other contiguous district, or in accordance with the decision of the regional committee initiated by OSPI, if recommended by the Oversight Committee. The proposed annexation and equitable adjustment of assets and liabilities must be based on the same factors used when making other changes in school district boundaries.

The order filed by OSPI that implements either the agreement among school districts or the decision of the regional committee must also specify that any excess tax levy approved by an annexing school district is imposed on the newly annexed territory. Before the effective date of a dissolution, a school district that annexes part or all of a financially insolvent district may submit to the voters either a levy to replace existing levies and provide for an increase due to the dissolution, or an additional levy to provide for an increase due to the dissolution. If these elections do not occur or fail, the transferred territory is relieved of any previous levy associated with the dissolved district, but subject to any previous levy associated with the annexing district. In the case of bonded indebtedness by a dissolved district, the annexing district may refund all or a part of it, or certify a levy to pay the debt. Boundary changes take effect on the date specified in an order filed with the county auditor. For the purposes of determining property taxes, the boundaries of an annexing district must be established on September 1 (rather than August 1 as is required for most other taxing districts).

Employees of a dissolved district have no continuing contract or grievance rights. The dissolution of the district is sufficient cause for contract nonrenewal or discharge. An annexing district has no obligation to observe terms of collective bargaining agreements of the dissolved district.

Staff Summary of Public Testimony: PRO: The state does not have a framework to address the dissolution of a school district due to financial insolvency. This bill provides a process that was developed at the direction of the Legislature by financial experts. A district being dissolved because of financial insolvency is an anomaly and has not occurred but once; however, the inevitability of this happening in the future is growing because of the continued cuts to school district budgets. This is not a stealth school district consolidation bill but is about helping districts get out of financial insolvency and providing a process when a district cannot become solvent so there is a clearly defined process to support the students to continue to get services.