Why should it turn out that large school districts like CCSD are especially prone to fraud, waste and corruption?

Lydia Segal makes a very strong case that a primary root of the problem lies — paradoxically — in the particular way in which schools have historically tried to lessen corruption: through ever-tighter layers of centralization, bureaucratic oversight, detailed standard operating procedures, rules and regulations and the over-specification of money controls.

All of this was supposed to ensure against fraud and waste, but the result, she says, was that

… as urban schools grew larger, [these measures] have actually eroded oversight, discouraged managers from focusing on performance, and made it so difficult to do business with districts that employees and contractors have sometimes had to seek “creative” or illicit ways to get their jobs done. The result is the worst of two worlds: Crooks who want to bilk the system can do so because the top has little handle on what is going on below, but employees who want to improve learning must sometimes break the rules. (Emphasis added.)

How does it happen that superintendents and top managers in a large school district become effectively blind to misbehavior going on below the upper echelon?

It has to do with the sheer incapacity of even talented and highly intelligent human beings to know everything of importance in today’s massive public school districts, given their complexity and highly specialized divisions.

This was a limitation that early 20th Century progressives, who led the drive toward centralization in large U.S. school districts, did not foresee. As Segal, like Ravitch, has noted, reformers wanted to take schools out of the grasp of “powerful local political machines that had turned many government agencies, including public schools, into patronage troughs,”

In Segal’s words:

Administrative progressives saw the influence of local politics on schools and other agencies as the source of many of their ills: bribery, extortion, political patronage, favoritism, and waste. To reduce the grip of political sachems, they embraced the scientific management models that had taken root in the blossoming industrial sector and worked to centralize, certify, professionalize, regulate, and restrict employee discretion. The belief was that the emerging corps of professionals in central school offices would be above politics, even-handed, and inherently less vulnerable to corruption and abuse

What progressives expected was that each level of school administration would monitor the level below, identify the important activities going on there, and dispassionately report up the chain of command to the district superintendent. Then superintendent would then issue rational decisions which, without obstruction, would flow down, level by level, for execution.

Notwithstanding the “scientific management” practices introduced, however, and the growing centralization of the districts,

…tales of school fraud and waste still made headlines. The locus of the graft was now different central and regional school bureaucracies rather than ward school boards were now the main source of trouble — but urban schools still had to deal with the ensuing bad press. They did so by invariably tightening the reins in central headquarters. (Emphasis added.)

The subsequent history of America’s three largest school districts shows

a relentless march, punctuated by brief, discreet experiments with community control and other forms of decentralization, toward centralization in relation to both school structure (as new central departments were added to the bureaucracy) and rules and regulations.

Segal’s book documents in detail the districts’ histories of both subsequent fraud and corruption scandals, and also the districts’ efforts to stop fraud by imposing ever tighter controls.

Today all three of America’s biggest school districts issue formal military-style Standard Operating Procedure manuals (SOPMs) that — to prevent cheating and save money — require reimbursement forms to be signed and approved by multiple layers of supervisors and meticulously backed by documentation.

“If there is any chance that an item could be used for personal purposes,” reports Segal, “the SOPM requires the employee to attach a written explanation, which also must be approved by various supervisors. Forms with errors are disallowed. Similar checks are required to process vendors’ invoices.”

Yet, notwithstanding all this, the fraud and corruption has continued. And because tighter, centralized control is a simple-sounding solution, federal and state politicians and bureaucrats for decades have gotten into the act quite heavily.

There is yet another reason why American school districts are today trussed up more tightly than an old-fashioned holiday ham. As the notion spread in the 20th Century that public schools are obliged to reflect virtually all of a democratic society’s needs and expectations, activists, labor unions and other school interest groups with political clout have been able to successfully impose an ever-increasing array of obligations on districts.

And as districts’ politically imposed obligations grew ever greater, says Segal, each mission, from construction and budgeting to payroll and personnel, grew staggeringly complex. Each new program required districts to hire more classes of employees, negotiate with a wider variety of vendors, and bargain with more unions.

Consider merely the areas of payroll and personnel:

The New York City school system, for instance, negotiates with 20 thousand vendors and about 40 locals, which roll up into about eight major unions. New York’s District Council 37, for example, has different locals representing substance abuse specialists, clerical aides, skilled carpenters, and many others. Districts have to apply the proper grievance procedures, regulations, and entitlements to each local. The payroll department must issue paychecks on different pay cycles, give increases at different intervals, allow different numbers of vacation and sick days, allow different benefits, and provide different advancement prerogatives to different classes of employees in each local. Officials must keep track of which entitlements are mandatory, applying to all members of a local, and which are custom, applying to certain groups of members.

In the Los Angeles Unified School district, there are 13 major collective bargaining units, each negotiating its own pay scale.

It has seven major types of employees on varying payment schedules, 80 earning codes, a multitude of status and time-reporting codes, and different ways to process paychecks for each employee group. Certificated employees can be placed on up to 16 different assignments, three calendars, five tracks, four bases, nine salary tables, and four salary payment options. Moreover, as in any large district, payroll and time-keeping formulae require constant updating to keep up with new union agreements and ever-new entitlement distinctions created among employees in the same local and usually based on their date of hire.

Notes Segal, the required calculations can be so involved and Byzantine that even experts get them wrong. Because of errors, the LA school district processes some 195,000 adjustments and 48,000 exceptions a year. The school’s auditors, like those in the Chicago Public Schools system, blamed complexity for repeated payroll errors. Sometimes, administrators are simply not able to keep track of every class of employee’s special payroll entitlements.

And that’s just examining, very cursorily, the area of payroll and personnel.

A major reason why large corporations around the world frequently spin off divisions into entirely separate companies is that with the increase in diversification and complexity, oversight at the top of an organization breaks down.[1]

Microeconomists largely agree, notes Segal, that normal organizations ought to change shape if they grow beyond about 3,000 employees. The reason is that, around this point, economists predict, top-down central controls become increasingly ineffective.

Clark County School District has approximately 30,000 employees.

The fact is, given the inherent limits of the human mind and the reality of “bounded rationality,” any organization’s chief executive can only handle so much information.

Accordingly, notes Segal, “Many experts believe that the three largest school districts, particularly New York and Los Angeles, have become simply too big to oversee and manage from the top.”

The issue is the immense degree of diversification and complexity facing a top school executive. When those factors increase together, as they do in a large school district, she says they “vastly accelerate the point at which the limits of the human mind are reached.”

Although candidates for highly compensated superintendent slots — in the $400,000 range — don’t mention it, this limit is elsewhere frequently acknowledged.

In 1999, California’s Little Hoover Commission declared, having extensively studied the state’s public schools, that the LAUSD is “too large to serve its students” and has become “staffed by an overgrown and inbred bureaucracy.”

As far back as 1961, reported Segal, a New York state study determined that the NYC school chancellor and his deputies

…could barely stay on top of operations. Upper echelon executives, the study said, were so swamped that they did not have time to deal with much of the paperwork that crossed their desks. Even lower-level regional executives such as district superintendents, who were supposed to implement policy from the central divisions, were “overwhelmed by reports and conferences.”

Moreover, she notes, this was the condition of the New York City school district “when the school district was a fraction of its size today.”

Because many issues arising in a school system are complex and technical, and notably so within administration back offices, information going up the chain of command to non-expert generalists needs translation by experts. This creates even more paperwork for top executives.

Thus, observes Segal,

As a command-and-control organization grows, its structure forces executives to pick and choose where to pour their energy. As James Q. Wilson has pointed out, because there “are limits to the number of different jobs managers can manage ... the cost of trying to do everything is that few things are done well.” Superintendents are thus likely to pick one or two core bureaus that deal directly with academic instruction for the regular student body.

“Unfortunately,” she notes, “while noncore programs might sound like just a few marginal areas of a school system, they constitute the bulk of school divisions today.”

Because most top-down school districts do not hold central divisions accountable for performance and because the top administrators cannot realistically oversee every corner of the district for compliance, the result is that many noncore areas will be able to operate virtually unchecked, essentially free from both performance and compliance accountability….

The upshot? People who work down the hall from one another sometimes do not understand one another because they speak different languages. More important, top executives — even if they had the time — cannot realistically “see into” most divisions and subdivisions.

Large, traditionally organized school districts thus become inherently opaque, not only to parents and the general public, but even to the district’s top management.

As top executives narrow their focus to what they can effectively handle, outside their focus what results are the rise of effectively independent administrative fiefdoms. The chiefs of these lesser kingdoms easily become invested in their autonomy and its resultant power and tend to become hostile to proposed changes that appear to threaten that autonomy.

The large school district, thus, develops an ongoing class of continuing administrators that maintains its dominance while superintendents comes and go. The size, complexity, and level of diversification and regulation inherent in these large systems, Segal says, “put any top executive who is recruited from outside at a disadvantage vis-a-vis the “permanent administration.”

The more regulated, complex, and large an organization, the more information and knowledge the chief executive needs to steer the system. This is where existing senior administrators are crucial…. To navigate their districts, chancellors and superintendents need the deep reservoirs of institutional knowledge that senior administrators possess. In effect, the chief executive must rely on these people and cannot afford to alienate them.

Furthermore, since superintendents and chancellors tend to turn over very quickly, to succeed they need existing senior administrators to trust them and buy into their goals as quickly as possible….

In this environment any chancellor understands that if he alienates senior school administrators, they will likely resist his goals and wait out his time in office until his replacement arrives.

The result is that superintendents must depend on the bureaucracy’s entrenched senior officials, who guard their turf fiercely, says Segal.

Given that dependence of superintendents, the opaqueness of large districts and the hostility of fiefdom chiefs to plans that would threaten their autonomy, the command-and-control structure of school districts has failed as a cure for fraud, corruption and waste.

In the large school districts, that problem remains as endemic as ever or even more so, says Segal. The very structure that was intended to stem the problem turns out to spawn effectively autonomous enclaves of power that often facilitate fraud, corruption and waste.

While acknowledging the difficulty of comparing the incidence of corruption over time in America’s largest school districts, Segal argues that the only realistic way to even arrive at an estimate is “by analyzing the number and severity of publicly released investigations, arrests, indictments and convictions.”

Having done so, she says, her investigative records suggest that the three largest school districts,” says Segal, could not cure the problem.

Indeed, she concludes,

Although the top administrators make most of the decisions in New York City, Chicago, and Los Angeles, the central of­fice’s control of waste and abuse often appears to be more show than reality. Crooks keep finding ways around them.

Coming in Part Three: CCSD’s ERP failure reveals chronically inadequate and wasteful district management

----------

Steven Miller is managing editor of Nevada Journal and senior vice president at the Nevada Policy Research Institute

 



[1] “Spinoffs are a common occurrence; there are typically about 50 per year in the United States. You may be familiar with Expedia’s spinoff of TripAdvisor in 2011, United Online’s spinoff of FTD companies in 2013 or Sears Holding Corporation’s spinoff of Sears Canada in 2012, to name just a few examples.” Investopedia.com at http://www.investopedia.com/terms/s/spinoff.asp