Brendan P. Walsh

In my last post I offered my analysis of Governor Snyder’s budget proposal.  Let’s take a closer look at what it means strictly to the Grosse Pointe Public School System.

I’ve reminded my readers many, many times that nothing has as great an effect on our local budget than Lansing’s decisions.  A high level reminder of the key ideas:

The state sets our operating revenue on a per pupil basis, called the Foundation Allowance.  Snyder’s budget reduces that amount by $470 per pupil, the highest such reduction ever – by a lot.  That’s roughly a 5% cut in itself.

Our second largest expense (behind salaries) is retirement costs, also set by Lansing.  This current proposal would deliver an 18% plus increase to a $11.6 million expense from 2010-11 to 2011-12.

I could go on for a while, but here’s the bottom line.  When your top line revenue gets cut 5% and your second largest expense increases 18% it amounts to the most adverse year over year change in Proposal A’s history.  The net effect is that the $1.9 million structural surplus brought about by the teacher retirement incentive we agreed to last year is wiped out and we now  project a budget shortfall of $6.2 million for the 2011-12 school year.

An 8% or so shortfall will be commonplace for Michigan’s 550+ public school districts who this spring will resort to the same tactics they’ve used for the last several years; higher class sizes, school closings, reduced programs, higher athletic fees, outsourcing, and tense contract negotiations.  They’ll do this while howling about Snyder’s budget – but plenty of angry constituencies sing in that choir (seniors with newly taxed pensions, low income families losing their tax credits, other tax credit industries, and on, and on and on.) 

Grosse Pointe will be an exception based on the contracts we reached with our employees last spring.  The driver behind the contracts was precisely what we see Snyder doing – the unexpected.  This is the problem with K-12 funding.  Forget the politics and fairness and all that stuff.  85% of all school district budgets are used to compensate employees directly (salaries) or indirectly (health care, retirement, etc.).  These contracts extend years, but from year to year we never know what Lansing will do to our largest revenue source and our second largest expense.  This is a bad combination.

In Grosse Pointe our contracts establish total compensation in a way that scales to changes in Foundation Allowance, health care and retirement costs.  We agreed that General Fund equity must always be returned to 10% should it ever fall below that amount.  Here’s how it works in a nutshell.

Each bargaining unit’s total compensation represent a proportion of our total budget.  If Fund Equity ever falls below 10%, each contract has a formula to follow to set the new compensation levels.  Here are the steps:

1. We calculate the total dollar amount required to return General Fund equity to 10% of total General Fund expenditures.
2. Every bargaining unit must reduce their total compensation (which is the aggregate of all their member’s total compensation) by the amount of their portion of the district’s total General Fund expenditure.
3. This proportion (a percentage) is multiplied by the amount of the total required to return fund equity to the 10% level.
4. The bargaining unit then decides how it wants to deliver the offset, which could be changes in health care, changes in salary, or other changes to offset the cost for which they are responsible.
5. The remaining amount to get to 10% not covered by the 85% going to contracts would need to be found in other areas.

In our current budget model for 2011-12, we project that at the end of the year our General Fund equity will be below 10% by $904,237.  Fund Equity would drop from just over 17% to just over 9%.

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In this example, it works out to about a 1% reduction in total compensation per employee.  Having done some analysis, the rule of thumb is that for every $1 million required to return fund equity to 10% our employees would have to take roughly a 1% reduction in total compensation. 

As mentioned above, that reduction may take different forms, and I think this is where the contract really gets interesting. Instead of taking a straight direct compensation pay cut, the teachers could choose to alter their health care plan to something less expensive – or to increase their contribution.  Doing so would be better for their retirement compensation than decreasing salary.  It would make no difference to the district’s overall budget.

Employees might look at doing something more creative in their work rules.  An example for teachers might be sick days.  As it stands now, sick days are unlimited for tenured teachers which brings with it some hefty substitute teacher costs.  If they weren’t unlimited, substitute teacher costs might be reduced substantially.  I’m sure there are other examples as well.

Another interesting development to monitor, back to Snyder’s proposal, also relates to employee health care contributions.  In his 2012-13 budget he’s proposed $300 million to incentivize districts to increase employee health care contributions to 20%.  Not many are doing that.  Even if half of all school districts did, this could conceivably equate to a boon of $375 per pupil, or over $3 million to our district.  I’ve already inquired to get more details on this provision.

In the broad strokes, this is why our contract is so visionary.  It aligns the financial motives of the Board, the taxpayers, and all employees.  Sure, no one can be truly happy at the prospect of our employees taking home less money, particularly since locally we can’t increase our tax revenue.  But this self-correcting model makes far more sense than closing schools, or reducing programs, or raising class sizes.

None of the above actions treat the root cause of the problem, but that’s what we were doing before and what most every other school district in this state will do this year.  We don’t have to because our employees have already agreed to share this sacrifice, one of the tag lines to Snyder’s budget.  Indeed we’ve said the same locally as well.

In return we will maintain most, if not all, the jobs of all of our employees.  Class sizes would not increase.  Participation fees would not increase.  Program options would not be reduced.  Jobs would not be outsourced.

If and when Snyder’s new tax structure starts to create jobs which would mean income and use taxes would begin to increase, our employees stand to benefit from that via the same formula.  We’re now all in the same boat, each with an oar in the water, pulling in the same direction.  It didn’t use to be that way.

As for our current budget cycle, I want us to be prudent and austere, but I do think to leverage our innovative contracts to their greatest extent that we should rely primarily on fund equity to bridge the projected shortfall.  If things stay this (bad) way, then employee compensation would have to adjust at some point anyways.  If this is how it will be, let’s begin the begin.