AUDIT CASTS DOUBT ON COLLEGES' FUTURE; L.A. DISTRICT'S DEFICITS MAY PROMPT MORE STATE OVERSIGHT.

Byline: Sharline Chiang and Paul Hefner Daily News Staff Writers

The Los Angeles Community College District spent $8 million more than it earned last school year, prompting auditors to warn Wednesday that the future of the nation's largest community college system is in jeopardy unless trustees can balance the budget.

Coopers & Lybrand auditors issued district trustees a ``qualified'' audit opinion - a warning that signals concerns about ``the future viability of the district,'' auditor Don Dyer said.

``It is a most serious matter, to receive that sort of reference in an audit opinion,'' said Dyer, who has been auditing the district for six years. ``This situation has implications for everyone in the district.''

The warning follows a decision last year by the state Community College Chancellor's Office to place the Los Angeles district on its ``watch list.''

State officials then didn't see the district in imminent fiscal danger, but called for analysts to monitor its financial health. Now the Chancellor's Office will review the listing early next year and decide whether to step up oversight of the district, said state spokesman Kyle Orr.

The state is the primary funding source for the district, which enrolled 99,654 students last school year at nine campuses, including Pierce, Valley and Mission colleges in the San Fernando Valley.

The auditors issued their warning after discovering that the district's deficit spending caused its reserve fund to plummet from $11 million in 1995 to $3 million in 1996.

The audit report does not reflect spending cuts made this academic year to narrow spending deficits at eight of nine campuses. Those cuts caused Pierce, Valley, Mission and other colleges to eliminate courses, lay off part-time instructors and student workers, and trim library hours. More cuts are on tap for the spring semester.

But even with those cuts, the district faces a projected $1 million deficit in its reserve at the end of this school year, said Bonnie James, the district's vice chancellor of operations.

``I still have concerns about our ability to truly balance our budget even in this fiscal year,'' James said.

``The trustees and the administration need to work together to make sure we have a management plan to arrive at a balanced budget,'' James said.

Trustees asked for suggestions to balance the budget during a meeting Wednesday.

``It's simple. If you've got X amount of revenues and X amount of costs, you have to cut it somewhere,'' Dyer said.

``But I don't have specifics on whether to cut it here, here or here.''

District administrators said the deficit spending was caused by overspending at the individual campuses. In turn, the district sent funds from its reserves to eight of its campuses to cover expenses beyond their revenues.

The largest single expense came in faculty raises, James said. Last year, for example, faculty unions negotiated a 6 percent raise beyond a 3 percent cost-of-living increase financed by the state. The 6 percent raises cost the district more than $6 million.

Officials in the state Chancellor's Office said the district's financial troubles have come despite the fact that state spending for community colleges has risen dramatically in recent years.

The increases were meant to cover the cost of growing enrollment, account for salary inflation and give community colleges a role in the state's welfare reform effort.

The current state budget sets aside $3.5 billion for 106 community colleges in 71 districts across the state. That's a $430 million increase from the year before. And that budget was up about $455 million from the year preceding it, Orr said.

``The last couple of years have been very, very good funding years for the system,'' Orr said.

But district officials said much of that funding couldn't be used to offset deficit spending from its reserves because it was earmarked for restricted programs.

The unrestricted budget is used to pay for salaries, supplies and utilities. Restricted funds can only be spent on specific areas, such as student financial aid and student activities.

James said this was the first year the district's audit report analyzed the unrestricted budget separately from the restricted budget, rather than consolidating the two.

``In combining the two,'' James said, ``it presents a misleading picture of the finances of the district.''