Where did the $18M in fund equity go?

At the end of the 2008-9 school year, the Grosse Pointe Public School System had $20 million in General Fund equity and ran almost a perfectly balanced budget. By the end of 2012-13 fund equity was $2 million. How did it happen?

The short version is that state funding cuts and declining enrollment reduced revenue by $30.4 million. In the same time, $30 million in cost reductions were found, but other costs increased by $17.4 million. The net effect was an $18 million loss of fund equity.

This first chart shows the revenue variance from 2009-10 through 2012-13 in relation to 2008-9 when the budget was balanced.

 GPPSS Rev Loss v 2009

From 2008-9 to 2009-10 the GPPSS experienced a $5.8 million revenue loss, the majority of which was the result of then Gov. Jennifer Granholm’s cuts of October 2009. That same $5.8 million persisted and got worse in the ensuing two years. Revenue was moderately increased from 2011-12 to 2012-13, but nowhere near the earlier losses. (More details on revenue patterns here.)

The second chart here sums up all the expense and revenue categories that affected fund equity from 2009-10 through 2012-13.

 

GPPSS 18M FE Loss

The black bars represent shifts that work to preserve fund equity. Those total $30 million. The red bars work against fund equity. You see again the $30.4 million in lost revenue wipes out the total effect of the black bars (and then some). It’s the other four red bars that generated the vast majority of the $18 million drop in fund equity. The biggest culprit – again – is ever increasing retirement costs. (See recent post on retirement costs for more detail.)

These charts may beg the question, how did the district generate $20.6 million in compensation reductions? Was it the contract formula clause?

The short answer to the second question is no. The biggest contributor to direct compensation cost reduction was job reduction. From 2008-9 to 2010-11, the district cut 80 full time equivalent positions. Also, the effect of the early retirement incentive (ERI) replaced dozens of our most highly paid staff with new employees who received significantly lower salaries.

The formula clause did not kick in until 2012-13 and even then, it reduced direct compensation by about $2.7 million. This means that 90% of direct compensation reduction is attributable to job reduction or the ERI effect. Meanwhile, as the second chart above shows, total compensation costs were increasing due mainly to rising retirement costs. The chart below summarizes the problem of relying on job reduction to balance the budget.

GPPSS Comp v FTEs

So in 2011-12, despite 78 fewer employee FTE’s (or 9.2%), the district’s total compensation costs were just $2.2 million lower (or 2.4%). About half the cost increases from 2010-11 to 2011-12 were retirement increases. The other half is attributable to direct compensation cost increases.

Of course history proved this did not work. The district was running annual deficits that averaged $4.5 million per year from 2009-10 to 2012-13.

In summary, the $18 million drop in fund equity is primarily attributable to rising retirement costs and significant reductions in state revenue. The ensuing employee contracts are essentially adjusting employee compensation to respond to those two state driven issues. As we’re seeing now, fund equity will return to 10% – the agreed upon levels – by 2016-17 and job loss has been stemmed.

Retirement costs in the GPPSS

Last week in response to the current gubernatorial election issue of K-12 funding, I wrote about state revenue to the Grosse Pointe Public School System in both the Granholm and Snyder administrations. My take was not all that different from the non-partisan Citizens Research Council brief published a few days ago.

Here’s an abridged abstract of the CRC report:

“Is school funding up or down compared to four years ago?”

Here the answer is an unequivocal ‘up’. While total state funding is up over $1 billion from FY2011 to FY2015, the increase is almost exclusively earmarked to satisfy school employee retirement costs.

“Has education funding gone up as much as it could have?”

Here the answer is ‘no’. State tax policy and budget decisions effectively stretched the School Aid Fund.

“Are individual school districts better off today than they were four years ago?”

An answer to this question is far less definitive. While the amount of per-pupil funding is up, districts are paying higher retirement bills. This leaves fewer resources for other school expenses.

 

The third answer above is the key one. Let’s look at the GPPSS’ retirement cost trends over the last decade. This first chart paints the picture. From 2002-3 to 2012-13 the district’s retirement (MPSERS) expense more than doubled, from $7.4 million to $15.7 million.

GPPSS Total MPSERS Cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Over this same period of time, state revenues varied, but by 2012-13 it was $2.9 million lower than 2003-4. Throw in the $8.3 million increase in state mandated retirement costs over the same time and it created a $11.2 million budget problem. Recall that state revenue and state retirement costs are solely dictated by the state, entirely out of local control. All we get locally is the problem.

 

GPPSS State Revenue

 

 

 

 

 

 

 

 

 

 

 

 

Taken as a percentage of the total General Fund budget, retirement costs (MPSERS) that had once consumed 7.8% of the budget in 2002-3 grew to consume 15.9% by 2012-13.

MPSERS as percent of GF revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

How did the district try to solve this problem? The shortest explanation is that jobs were slashed. In 2002, the district employed 1069 full time equivalent employees. By 2010, the district employed 852 – a reduction of 20% of our workforce – far outpacing the 7% reduction in enrollment.

GPPSS FTE Employees

 

 

 

 

 

 

 

 

 

 

 

 

 

So why the reduction in retirement costs in 2013-14 (as seen in the first chart above)?

That is the ultimate effect of the employee salary reductions of 3.4% in 2012-13 and 4.9% in 2013-14. Reducing salary cost is the only way to reduce retirement costs.

From 2007-8 to 2011-12, without the benefit of the contract formula, fund equity plummeted by $18 million despite that massive reduction of employees. After the contract formula took effect, the district started to run annual surpluses that will return fund equity to 10% by 2016-17. Meanwhile employment levels remained flat.

Fund Equity Trend

 

 

 

 

 

 

 

 

 

 

 

 

 

Reducing direct compensation costs via the contract formula was the only permanent means of fixing the problem created by the state funding mechanism and was crafted primarily to prevent the underfunded state retirement fund from destroying the Grosse Pointe Public School System.

GPPSS in Granholm, Snyder Eras

Tonight’s town hall meeting, a form of debate between incumbent Governor Rick Snyder (R) and challenger Mark Schauer (D), the gubernatorial candidates sparred over Gov. Snyder’s record on K-12 funding.

“Today, it is a fact that schools still have less per pupil dollars in the classroom than when he started four years ago,” Schauer said. “…Don’t take my word for it. Talk to any teacher. Talk to school board members, parents all across this state.”

These are complicated answers, but here’s a start with some facts. The first chart below, extracted from the Grosse Pointe Public School Systems’ annual financial audits, shows total state revenue flowing to the district. It spans the Gov. Jennifer Granholm era (2003-2010) and current Gov. Snyder’s era (2011-2014).

 

GPPSS State Revenue

 

 

 

 

 

 

 

 

 

 

 

 

The greatest cuts in state aid to the GPPSS is undoubtedly from the 2007-8 school year through the 2009-10 school year, during which time the Granholm budgets cut state aid by $9.1 million. Meanwhile, in the Gov. Snyder era, state aid has increased in each of the last three years.

We need to go a layer deeper here though. In Michigan, state aid follows student enrollment and we can’t necessarily blame Gov. Granholm directly for lost student enrollment. The correlation between declining enrollment at state aid is clear in the period from 2007 through 2010 when the GPPSS lost 483 students. At roughly $8,000 in state aid per student, that’s about $3.8 million in lost state revenue.

If we deduct that from the $9.1 million state aid loss, that’s still a $5.3 million cut in state aid to the GPPSS in that three year period.

GPPSS Enrollment

 

 

 

 

 

 

 

 

 

 

 

A different cut of the numbers normalizes for enrollment fluctuation. If we look at just the defined state aid per pupil, gathered from the Michigan Department of Education data, we can see the most significant reduction came in the 2009-10 school year, at Gov. Granholm’s executive order, that led to a $520 reduction in state aid for GPPSS. The worst part of that cut was that it came in October of 2009, four months after the district was required to pass a budget that had not anticipated such a cut.

 

GPPSS Revenue Per Pupil

 

 

 

 

 

 

 

 

 

 

 

The subtlety of Schauer’s state is his qualifier “in the classroom.” He seeks to discredit Gov. Snyder’s K-12 funding increases by claiming those increases went to replenish the state’s decimated Public School Employee Retirement System (MPSERS), the retiree pension and healthcare fund.

You can’t segregate MPSERS cost increases from the budget picture nor claim that that money does not go “into the classroom” when it indeed funds the retirement benefit of the teachers and other staff who are indeed “in the classroom.” What’s more, if the shoe fits for Gov. Snyder, it does so for former Gov. Granholm as well, as I wrote in this March, 2010 blog on this very topic.

Lots more time would be needed to contrast these two administrations, but if Mark Schauer were to ask me, I’d tell him the Granholm administration’s budgets have done far more damage to the GPPSS than Gov. Snyder’s and the numbers bear that out without dispute.

 

Keep perspective on GPPSS teacher compensation

A school board candidate expressed concern about employee morale in relation to the teacher contracts. We must deal in facts when such matters are discussed. As I always do when I discuss teacher compensation, I remind that discussing it is not the same as complaining about it or saying that teachers are overpaid.

I do say our teachers are paid very well for the great work they do and have working conditions extremely rare when compared to their peers across the state. For those who worry that our compensation systems are a detriment to getting the best talent, I suggest you look at facts and realize our compensation plan and working conditions should be our competitive advantage to getting and retaining the best teachers. The numbers bear this out.

The first chart below shows where the GPPSS teachers sat on a curve of the 588 districts ranked by the state. I indicate GPPSS position with the red dot.

Salary Chart

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Of those 588 districts in 2012-13, the GPPSS was ranked 9th highest in the state. The chart below shows the districts that pay their teachers, on average, more than the GPPSS. It also shows the ratio of general education students to general education teachers for those same districts. The lower the ratio the more teachers the district employs in proportion to students. The state ranking is listed as well, ranging from a high ranking (fewer teachers) to low ranking (more teachers).

Only 41 districts had a lower ratio of students to teachers than the GPPSS – and none of them paid their teachers as well as the GPPSS does. The lower ratio usually means smaller class sizes and more course offerings (e.g. 7 period versus 6 period day).

Top 10 Salary

 

 

 

 

 

 

 

 

 

 

 

 

 

Now let’s look at the effect on the district in two ways. How many fewer teachers would we employ if we (a) paid the same average salary as the cross referenced district, or (b) had the same higher ratio of pupils to teachers as the cross referenced district? The chart below shows that for all the school district whose teacher average pay is higher than the GPPSS. As a point of reference, in 2012-13, the GPPSS employed 424 general education teachers.

Fewer Teachers

 

 

 

 

 

 

 

 

 

 

 

 

 

The third chart shows you how hard it is to compensate teachers very well AND keep class sizes down and course offerings up. Meanwhile in the bigger financial picture, we’ll be able to do so while running annual budget surpluses and return fund equity to 10% by 2016-17.

The data here is for 2012-13 so many will wonder what happens to our rankings given the 4.9% reduction in 2013-14 and the on-schedule salary increases of 2015-16 and 2016-17 (1% and 1.8% respectively). After all that, if no GPPSS teachers progressed on step and lane increases (an impossibility) the GPPSS average salary would rank 15th of the 588 in Michigan. Of course it will be higher than that.

The 70 or so new teachers that were hired in 2010 as a result of the Early Retirement Incentive started in 2010-11 at a base salary of about $39,000. The current salary schedule will pay those same teachers at least $50,419 in 2016-17 if they still have just a bachelors degree. If they have obtained a Masters degree by then, they will earn $59,205, a nearly 50% salary  increase. Our salary schedule allows teachers to progress their compensation quickly. Contrary to the belief of some, the new contracts did not punish our younger teachers.

As for non-teaching staff compensation, or as to why we no longer offer unlimited sick days, these are the upshot of the compensation plans we offer teachers. The budget contraction period from 2008 through 2012 proved that.

The process to get the district to budget equilibrium was brutal and I can understand why employees may be scarred. But we have to maintain perspective. We do pay teachers very well and will continue to do so. The alternatives were far worse.

The Grosse Pointe teacher contract settlement of 2010

bwexpPicture 016Few events in the history of the Grosse Pointe Public School System are as significant as the teacher contract settlement of 2010, reached at the nadir of the State of Michigan’s economic collapse.

I have captured a part of that history in this narrative. I have undertaken this effort because I care about the Grosse Pointe Public School System and knowing this history and the particulars leading to the decisions made will only help future policy makers in the days ahead while helping other district stakeholders make sense of what transpired in our past.

Narrative of 2010 GPPSS Teacher Contract by Brendan Walsh