Brendan P. Walsh

The Grosse Pointe Public School Systems’ annual financial audit reveals the district ran an operating deficit in 2015-16 ending a two-year run of increasing fund equity and falling well short of budget goals. The $635,000 loss moves the district further away from its long-standing goal of achieving a fund equity balance equaling 10% of its total annual General Fund operating expenditures.

The loss reduces fund equity to 7%, opening up a $3 million gap to the 10% target. The 2015-16 result was a massive setback in comparison to the employee bargaining unit target of $11.5 million. The contracts that expire in August, 2017, specified a 2016 ending fund equity of 11.5%.

2015-16’s annual loss of $635,000 is $2.2 million worse than the district’s original budget plans that had forecasted a $1.5 million surplus and $455,000 worse than its last budget amendment. The Plante-Moran report’s “Management and Discussion Analysis” attributes the loss to “unanticipated decrease in special education revenue sources at the state and local level,” however, a closer analysis of the 2015-16 budget’s various amendments does not support this explanation. In comparison to the most recent budget revision, the audit shows the district accounted for both increased state revenue (MPSERS UAAL funding for my fellow wonks) and lower special education revenue. In fact, the audit reveals that total revenue exceeded the last budget revision by over $450,000. Expense increases, however, more than wiped those gains away and exceeded the last budget revision by $911,000. Roughly half of that can be attributed to human resources expense and the rest to non-HR expenses.

The details are important, but we shouldn’t miss the big picture. District revenues have been basically flat for the last four years while district expenses have increased by $4.7 million from just two years. This chart tells the story.

While it is an unpopular story, the only reason the district ran a surplus in 2014 and 2015 was on account of reduced employee compensation. Note in the above chart the blue line bends down starting in 2012, correlating with compensation reductions. The subsequent expense increases in 2015 and 2016 are driven mostly by salary and retirement cost increases. As the district is already a third of the way through the current budget year that must account for a 1.8% increase in employee compensation, a $2 million operating loss in 2016-17 is not out of the question. This would reduce fund equity to 5% and widen the gap to the bargaining unit contract target to $6.5 million.

If all this holds true, even if the Wayne County RESA enhancement millage passes, it’s $3 million in annual revenue (coming at a cost of $5 million annually for GPPSS taxpayers) would be consumed mostly to cure this structural deficit and the remaining $1 million in annual surplus would replenish fund equity, taking perhaps 5 more years to return it to the board established target of 10%.

The district leadership, board, employees and community meet at a familiar and unpleasant crossroads, particularly if the Wayne RESA millage fails.

How will the district ever bridge the gap of the structural revenue losses and expense increases brought on by The Great Recession? That bill remains due. As the Plante-Moran report highlights, “For the 2015-2016, the School District’s foundation allowance was increased to $9,864. For comparison purposes, the School District’s foundation prior to the [2011-12] $470 cut was $10,184, meaning the current foundation is $320 per pupil below the 2011 foundation allowance.” Certainly that cut remains a problem, but student enrollment loss and retirement cost increases are right there with it.

Ironically, the popularity contest (a.k.a. election) facing the community next Tuesday, will be quickly followed by the unpleasant task of addressing this structural gap. Some way or another, elected board members will make large segments of the population (euphemism alert) unhappy if they desire to be effective in their roles. Those candidates who are pledging against holding employees harmless under these conditions are free to campaign on this basis…provided they share whatever very unpleasant alternative they will need to embrace to solve this problem before the district moves to a negative fund equity position.