West Allis school district turns to taxpayers after blowing through $17.5 million in reserves

Andrew Chromy knew when he signed on as director of business services at the West Allis-West Milwaukee School District in October 2014 that the suburban Milwaukee district had overspent its budget by $5 million and was dipping into its fund balance.

It was not a best practice. But sometimes there are legitimate reasons to tap those reserves, which every district keeps on hand for cash flow and emergencies.

It wasn't until three months later that he started to suspect something was seriously amiss.

While preparing for the annual spring 2015 debt payment, Chromy found a reference to a $2.59 million bill — for money borrowed to fund retiree benefits — that had never been budgeted.

Alarmed, he began digging through district accounts, department-by-department. What he found was a "muddy" accounting system with few internal controls — and millions of dollars in expenses that exceeded the district's budget or were never budgeted at all.

"In all honesty, I was not sure how we were going to function the next year, we were so grossly over," Chromy said.

That was just the beginning. By the time Chromy and the district's auditors finished digging, they would find at least $14 million in overspending during the 2013-'14 and 2014-'15 school years alone — on everything from salaries and benefits to teacher training and technology — and questionable practices dating to at least 2007.

By the summer of 2016, it appeared that West Allis-West Milwaukee had accomplished what at least one state auditor said he had never seen before: In the course of a decade, the suburban Milwaukee district, one of the state's largest, had blown through $17.5 million in reserves and posted a $2.1 million deficit.

Nearly a year later, it is still trying to dig itself out.

The district has hired a new superintendent and says it has trimmed staff and department budgets. It recouped $10.5 million from a high-profile lawsuit, and it is selling and leasing buildings, and consolidating schools. Its fund balance is expected to rise to $6.5 million when it is next calculated on June 30.

In April, it will ask taxpayers in its modest communities to authorize an additional $12.5 million — or about $290 per student each year — beyond what they already pay in taxes for operating costs over the next five years.

Without the referendum, Superintendent Marty Lexmond says, the district may be forced to cut programs such as art and music and shelve ideas for new ones — a language-immersion school, for example, or a next-generation high school — that are designed to keep families in the district.

"All of those ideas take money," said Lexmond, who took over as superintendent in 2015, a year after his predecessor, Kurt Wachholz, abruptly retired under pressure from the school board.

"We can't spend all our efforts cutting things. We have to build new things so we can attract families and keep families here," he said.

Credit collapse

In the world of school finance, fund balances are particularly important. Because of the way public schools are funded — through periodic payments from local, state and federal governments — many districts use a combination of their reserves and short-term borrowing to meet their obligations throughout the year.

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The collapse of its fund balance pushed West Allis-West Milwaukee's bond rating from A to B2, effectively designating it as a high credit risk. As a result, it lost its line of credit with its longtime lender. It took out what's known as a TRAN, or Tax Revenue Anticipation Note — think of a payday loan for government entities — at a higher interest rate. But it couldn't get that for a second year because of its lack of reserves.

At that point, as a last resort, it raised $26 million in a bond sale brokered through Robert W. Baird & Co. that is now costing it $1 million a year.

If the district can rebuild its reserves to $20 million, as it hopes to, Chromy said he can slash those borrowing costs to less than $60,000 a year.

"A million dollars a year in short-term borrowing is a waste of a million dollars," said Chromy, now director of finance and operations for the district. "With that, we could get more teachers, more field trips, more interventionists — we could get 13, 14 teachers for $1 million."

Investment debacle

West Allis-West Milwaukee can trace its slide to 2006 when it agreed to invest $20 million — half of it borrowed — in high-risk financial instruments known as CDOs, or synthetic collateralized debt obligations, as a way to fund health care and other benefits promised to retirees. The investment tanked in the financial meltdown of 2008, and the district lost it all.

It filed a lawsuit, along with four other districts in the same boat — together they lost about $200 million — but it was still on the hook for debt payments that reached $2.65 million a year in principal and interest. Instead of building those into its annual budgets, the district began paying them out of its reserves.

It continued to tap the fund balance for other big-ticket items: $1.9 million for a new school building for Lane Elementary and $6.5 million for its district offices and adjacent school on S. 70th St.

The district offices complex, which the board is now selling to a developer, was supposed to pay for itself and generate additional revenue. Instead, it only added to the losses. Initially, tenants generated more than $800,000 annually. But over time, most have moved on and the rental space is largely vacant.

In addition to the big-ticket items, the district overspent its budgets on dozens of accounts between 2013-'14 and 2014-'15 alone, often by staggering amounts:  $3.7 million in overruns for salaries and benefits, $146,000 for teacher training, $786,700 for technology; and $671,738 for a soccer complex board members say they thought was entirely grant-funded.

Some expenses have drawn state and federal scrutiny. Last year, auditors at the Wisconsin Department of Public Instruction were called in to assist the U.S. Department of Education, which had raised concerns about West Allis-West Milwaukee's handling of three federal grants. In the end, the district agreed to return $73,000 of the $1.6 million it received to federal officials.

How could this happen?

It's not clear exactly how a school district, or any governmental entity, with a $120 million budget could overspend by millions of dollars and blow through its reserves without anyone noticing until it was too late.

"We asked the same questions," said Bob Soldner, director of school financial services for the state Department of Public Instruction. His staff of two auditors reviews the annual audits of 424 districts across the state, looking for any issues flagged by the districts' auditing firms. They are preparing to take a much closer look at West Allis-West Milwaukee's current audit and the one before it, according to Soldner.

"I don't recall ever seeing anything like this," he said.

Sources have suggested a litany of possible factors: the opaque accounting system and lack of routine monitoring of expenditures; a top-down administration in which then-Superintendent Wachholz was the nearly exclusive conduit of information for the board; annual audits devoid of red flags until 2014-'15; and the failure of school board members to exercise adequate oversight.

By all accounts, Wachholz had big dreams for the school district. A longtime teacher, coach and principal, he was named superintendent in 2003. He boosted enrollment, mostly through open enrollment and a 4-year-old kindergarten expansion. He expanded summer school and recreational programs. And he became a nationally known proponent of personalized and "next-generation" learning, hosting educators who traveled from around the world to see it in action.

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Board members say he spent money to make all of that happen.

"He wanted the district to be a shining star in the state, and I think he'd do that at any cost. He just cared about it so deeply," said longtime board member Pat Kerhin, who served as president at the time of Wachholz's retirement.

Deb Rouse, then-director of business services, she said, "was really good at what she did and understood the budget very well." But she was loyal to Wachholz, Kerhin said, and would not have felt comfortable contradicting his advice to the board.

"Kurt always wanted to be the bottom line of information. But what we found out, after the fact, that not all of the things he told us were so," she said. "Sometimes, not all of the story was there."

She points, for example, to the remodeling and furniture costs associated with getting the newly purchased buildings and the personalized learning program up and running.

"I don't want to say it was deception. It was well-intentioned," Kerhin said. "But the bottom just fell out."

Wachholz rejected suggestions that board members were misled or that he was the source of their financial information.

Wachholz said Rouse prepared and presented all financial information to the board, and that while the two of them went over information before giving it to the board, it was wrong to suggest that she would in any way be intimidated by him.

"Deb is an individual of high character and the consummate professional and would never make a financial decision, plan or recommendation she didn't believe in," he said in an email to the Milwaukee Journal Sentinel.

He also implied that board members should examine their own conduct. "Where do the responsibilities of Board members lie in this if they were unclear or needed more information at the time decisions were made and approved by them," he said in an email. "There was ample opportunity."

Efforts to reach Rouse were not successful.

Wachholz said every major project during his tenure had a financial plan that was shared with the board, and that board members knew the fund balance was being tapped for debt payments and building purchases.

And, he notes that he had retired before the 2014-'15 school year — the first time auditors cite concerns about the district's finances.

Wachholz retired with a $163,500 severance package in July 2014 in the wake of complaints from staff about morale, workload and allegedly deceptive reporting practices for such things as student attendance, academic performance and disciplinary actions. Rouse retired in October of that year.

District officials say their departures had nothing to do with the financial problems, which they say had not yet come to light. And they are confident there was no misconduct or negligence, based on a verbal report from the accounting firm Baker Tilly Virchow Krause, which was hired to do an independent review of expenditures for the 2014-'15 school year.

New financial controls

Since the financial meltdown was uncovered, the West Allis-West Milwaukee School District has adopted a number of new controls designed to ensure it does not happen again, board members and administrators said.

Board President Jeff Sikich said it has hired a full-time certified public accountant to "keep an independent lens on everything." It changed auditors, and adjusted its budget timelines to allow for more board scrutiny.

The district monitors cash flow daily now and reviews expenses against the budget monthly. And board members get a monthly rundown of those expenditures. In addition, other top administrators — not just the superintendent — now regularly attend board meetings.

"This isn't one person's fault," said Sikich who, like Kerhin, said he believes Wachholz had the district's best interests at heart. "It's like having crab grass in your yard. It's just a little and you don't take care of it and, then the whole yard is covered. I'm not sure we had things in place to stop that," he said.

The community appears split over the referendum. Kerhin puts it at about 50-50, given the questions about whether the district has been a good steward of tax dollars. She would have preferred to ask taxpayers for money to maintain and repair its aging buildings — a referendum most concede will be needed in the coming years — rather than ask for operating funds.

But Sikich said the district has no choice.

"It's simple. If we don't get the money for operational expenses, something's got to give," he said. "Unfortunately, that will be programs ... and teachers."