GILROY -- The Santa Clara County Office of Education has imposed a spending and hiring freeze on the Gilroy Unified School District, to avert a deepening a financial crisis and cash-flow crunch.

The freeze is the latest measure to help set the district's fiscal house in order, after the county office in late January formally labeled the K-12 district at risk of not being able to meet its financial obligations. It's the first time in 20 years that the county office has made such a declaration, said Nimrat Johal, who has been assigned from the county office as Gilroy's fiscal adviser.

The freeze will not affect education in the 10,680-student district, Superintendent Deborah Flores said. Employees will continue to be paid and to receive benefits.

The county office of education, which oversees the budgets of the county's 31 school districts, dispatched Johal Feb. 1 to oversee Gilroy Unified's financial operations after it determined the depth of Gilroy Unified's financial risk. The county office earlier had met with the district and sent letters expressing increasing alarm.

To rein in costs, Johal declared the freeze Monday, covering overtime, hiring, purchases, support-staff substitutes, classroom budgets, travel and conferences. She and Flores said they're confident the district will come out on solid financial ground.

The county office has loaned the district $3.8 million, authorized $1.2 million more and worked with the district's staff to curb spending and stabilize the finance department.

In January, worried when the midyear budget numbers showed precarious finances and concerned the district had not presented a plan requested in August to stabilize its budget, the county office issued two scathing letters to the Gilroy Unified board.

Among the concerns, Micaela Ochoa, the county office's chief business officer, cited:

  • Failure to apply for an exception for deferred state payments, so the district could receive critical funds on time this year.

  • A projected inability to meet an April deadline for repaying a loan.

  • A projected increasing deficit spending for the current and next two school years.

  • Failure to meet state requirements for a 3 percent reserve.

  • A $950,000 shortfall in self-insurance funds.

  • Failure to notify the county office of labor agreements, which affects the budget, including the latest teachers' contract that requires the district to restore 10 furlough days.

  • An apparent overpayment of $2.3 million for health and welfare benefits and a failure to transfer funds for dental and vision insurance premiums since July.

    A Jan. 23 letter from county schools Superintendent Xavier De La Torre stated, "I am also concerned about the district's overall deficient fiscal oversight, state of turmoil in both managerial and staff-level positions and a lack of accountability in the district's ability to effectively manage its finances." He added that requests to Gilroy for information "are often ignored or not responded to in a timely manner."

    Flores said she was not aware that the county office was not receiving replies from her staff until January. Since then, "I've addressed the issue about communications."

    She said that in 1½ years, the finance department has undergone high turnover, with a succession of people, including temporary employees, in fiscal services and accounting. She also said that Rebecca Wright, assistant superintendent for business, who oversees fiscal services is also responsible for five other departments.

    The school district last week filled two vacancies, which has improved its fiscal operations, Flores said.

    Gilroy board President Jaime Rosso conceded that the county office's discoveries were embarrassing for the board. He didn't know of the district's fiscal distress until the county office called Flores in December and he joined the discussion. "It caught us completely by surprise," he said.

    However, in response to the intervention of the county office, he said, "We are doing everything that's being asked."

    Johal, who continues to work for the county office as director of district business and advisory services, agreed that the district is cooperating and praised Flores and the school board. "I have no doubt about the sincerity of intent and effort," she said about Gilroy Unified. "This district will come out with flying colors."

    Contact Sharon Noguchi at 408-271-3775. Follow her at Twitter.com/NoguchiOnK12.