Opinion ID: 2982405
Heading Depth: 3
Heading Rank: 2

Heading: DPS’ Financial Straits

Text: Almost immediately after starting as CFO, Plaintiff had to grapple with the serious budgetary issues that afflicted DPS. Plaintiff discovered that some vendors were billing DPS for services they did not actually perform. Plaintiff raised these instances of financial mismanagement with the Board in August or September of 2007. Dismayed by the chaotic financial situation in DPS, Calloway asked the Board to allow the Council of Great City Schools to perform an audit. The Board denied Calloway’s request, but Calloway was able to obtain funding from an outside source. The audit went forward, although Plaintiff would have to wait until May 2008 for the results. DPS’ fiscal year begins on July 1. The budget-writing process usually begins in February and stretches through June, when the Board must adopt a budget. Under Michigan law, a school district “shall not adopt or operate under a deficit budget, and . . . shall not incur an operating deficit in a fund during a school fiscal year.” Mich. Comp. Laws § 388.1702(1). In addition, a condition of DPS’ 2005 debt issuance meant that if the district adopted or operated under a deficit budget, the State would appoint an emergency manager to administer the district’s finances. These legal pressures made it even more important to balance the district’s books. As in any budget, DPS had to balance its expenses with its income. Walter Esaw, DPS’ Executive Director of Budget, asserts that Plaintiff made missteps in both columns. One source of unexpected expenditures was something known as the “fallout account.” As DPS prepared its budget, it would consider whether any teachers or other employees would be laid off before the next fiscal year. These employees were placed in a fallout account, effectively removing the cost -3- No. 13-1515 of their salaries from the next year’s budget. All should go smoothly if these employees are in fact terminated before the next fiscal year. But if they are not, the cost of their salaries will not have been included in the annual budget. Plaintiff was on notice of the fallout account and its pitfalls as early as August 31, 2007, when she received an e-mail from Esaw containing the details of the fallout account and warning, “Remember there is a huge liability attached to these fallouts if not removed.” (R. 58-5, Esaw Aff., at 1367.) Esaw also claimed that Plaintiff mismanaged the revenue side of the DPS budget. A large portion of DPS’ revenue depends on the number of students enrolled and attending school. Michigan determines the number of students by totaling those in attendance on “count days.” But according to Esaw, Plaintiff and Calloway decided to budget based on enrollment projections. Apparently, these projections anticipated more students than actually showed up on count days, meaning that DPS would receive less revenue from the state than budgeted for. For her part, Plaintiff asserts that one of the major problems with the DPS budget process was a failure to account for grant funding earmarked for special purposes. These grants can only be spent on specific projects, but the state’s required reporting format apparently obscured the limited utility of these funds, making it appear that DPS had a much larger revenue pool than it in fact did.