Brendan P. Walsh

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.

 

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.

 

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.

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.