It’s been a while since we checked into the GPPSS finances and the below is a wonky reintroduction as we examine the audited financial results from last year’s (2016) financial performance as well as the resulting effect on the current (2017) budget.
In the big picture view, unfortunately it’s mostly not good news. If we reflect on the budget challenges of the last ten years, think of three-headed monster that’s been mercilessly and intermittently ravaging the district’s budget. The heads are:
- Reduction in per pupil funding
- Increasing employee retirement costs
- Decreasing enrollment, which brings reduced revenue
The first two stole the headlines from the mid-2000’s and through the next ten or so years. By and large, those two heads have been asleep for the last few years. The third head has been plodding along, slowly and steadily chopping away at the district revenues. As you’ll read below, declining enrollment is now a horrible menace to district financials.
I’ll introduce a thought here that will require more of it’s own coverage, but here are the broad strokes. We see now the district continuing to lose student enrollment which results in budget contraction. Then we see the simmering problem of the need for more building repairs and capital improvements, which at one point seemed to be pointing toward a new bond issue. Then along comes the unexpected approval of the Wayne County Enhancement millage with its $3.0 million in annual revenue. What happens when that money then gets deployed to basically bridge the structural budget deficit brought on by declining enrollment, depleting the chance to use it to fund building repairs in increasingly more sparsely attended schools?
If you’re not connecting the dots, this is all begging for an objective look at building utilization. And even though many other districts have walked this path, none have the “neighborhood schools with no buses” profile of a GPPSS.
At that point the budget challenge gets very real in a way the district perhaps has never experienced. In the very likely event the district enters the arena of needing to pick among an array of massively unpopular budget options, we would add school closings to the trick bag.
More thoughts to come on that, but that’s the bottom line. On to the financial wonk.
Observations on 2016 audit compared to 2015 audit:
Starting with the Bottom Line: Significant loss of student enrollment, combined with lower county revenue, higher employee compensation and higher building maintenance expenses more than eliminated the operating surplus of $1.9 million in the 2015 budget resulting in a 2016 operating loss of $635,000. The two year run of increasing Fund Equity ended.
The wonky details:
- The loss of 179.6 full time equivalent (FTE) students from 2015 to 2016 based on a Foundation Allowance (state and local revenue) of $9,864 per student per year resulted in a year over year loss of $1.8 million of revenue.
- State mandated retirement cost (MPSERS) UAAL (unfunded liability) revenue increased by $2.3 million year over year. This is a pass through cost, meaning the state sends the money to the local districts who then send it right back to the state. It yields no benefit to the local budget.
- When normalizing the revenue by disregarding the MPSERS UAAL pass-through revenue increase, in total, state and local revenue dropped by $2.1 million from 2015 to 2016. Most of that is attributable to the 179.6 student FTE reduction.
- Federal and County revenue sources dropped another $1.0 million. Disregarding the MPSERS UAAL pass-through revenue, total district revenue was down $3.1 million from 2015 to 2016.
- Instructional expenditure increased by $2.0 million year over year, mainly due to the distribution of the MPSERS UAAL increased expense across the employees, but also the 1% salary increase was a factor as well.
- Operations and Maintenance expenses increased by $1.0 million year over year.
- In total, all expenses increased by $2.8 million. If we assume $2.3 million of that is the distribution of the increase in MPSERS UAAL, then expenses increased $0.5 million. Since revenue (net of MPSERS UAAL) decreased by $2.1 million, the year over year negative effect on the budget was $2.6 million. This is why the $1.9 million surplus of 2015 became a $634,000 operating loss in 2016.
Observations of the 2017 budgets (the originally approved budget compared to the proposed first budget amendment, which will be voted on this month, the proposed GAAA #1):
Bottom Line on the 2017 Budget: Enrollment loss continues to be the main problem plaguing the district. Meanwhile, average total compensation (salary and benefits) for employees has increased for the last four years. Since 2012 to now, the district has lost 5% of its student enrollment, but despite a 6.4% reduction in teacher FTE in that same time, the district is not reducing cost at a pace equal to the revenue loss. This means ratio of students to teachers is increasing. The combined enrollment reduction of 2016 and 2017 are the largest percentage drop in enrollment of any two year period in the last ten years and amount to a revenue loss of about $3.0 million per year in total just in the last two years. Enrollment has now dropped to its lowest since 1993. The major difference is that at that time, 24 years ago, district enrollment was on the rise.
The wonky details:
- The district had budgeted for a net loss of just 25 students., but in actuality enrollment dropped by 95 students resulting in an additional revenue reduction of $870,000. Total year over year revenue loss due to enrollment will be about $1.0 million.
- The original 2017 budget approved last June seemed irrationally high in its state revenue assumptions when it projected a $1.7 million increase compared to 2016 audited actuals. Perhaps this is attributable to a projected MPSERS UAAL increase, but I do not know. The proposed budget amendment (GAAA #1) moves the state revenue estimate to just $700,000 less than 2016 actuals which makes sense given the enrollment losses. (State revenue rises and falls with enrollment..and of course it is mostly falling.)
- County, or Other, revenue is projected to increase by almost $1.0 million from last year’s audit making total revenue about flat from the 2016 audit, despite the enrollment loss.
- Total Instructional expense in the as yet to be approved GAAA #1 is projected to be $146,000 lower in 2017 than the 2016 audited actuals despite the 1.8% on-schedule salary increase for teachers over last year. For instructional staff with an aggregate base salary of about $40 million, a 1.8% increse equals about $720,000 in salary cost increase year over year. Unless there were 15 to 20 fewer teacher FTE year over year, it seems impossible to believe. This would mean expenses are understated.
- Total expenditures in GAAA #1 project to be about $1.0 million higher than the audited actuals of 2016. With revenues essentially flat year over year (GAAA #1 compared to 2016 audit), this would result in a $1.5 million operating deficit in 2017 WITHOUT factoring the Wayne County Enhancement millage revenue of $3.0 million.
- Bear in mind point number 4 above. It seems unlikely that Instructional expense would not be higher given the 1.8% salary increase, which could increase expenses by nearly $1.0 million. If that were true, again without the Wayne County Enhancement Millage revenue, the 2017 operating deficit could reach $2.5 million.
- If this were true, it would mean that if the Board were to apply the Wayne County Enhancement Millage to the General Fund, all it would do is bridge the structural deficit of $2.5 million and add about $500,000 to Fund Equity. Translated: The unexpected $3.0 million in annual revenue would not alter the district operating budget appreciably and very little of the new millage revenue is available for building or technology funding.