At the Board of Education meeting on June 25th, we passed the 2012-13 budget. My presentation (embedded below) had a couple themes.
The first is the importance of a district’s structural financial condition. This is defined as the relationship between its operating revenues and expenses that, unless otherwise altered, will yield an operating loss (deficit) or gain (surplus). The aggregate of these annual surpluses or deficits from the time a district began to operate is its equity (surplus) or deficit.
Nearly every district in Michigan is operating with an operating (structural) deficit yet a positive, but dwindling, fund equity – used to plug the structural deficit with long term savings. In this state, these questions arise: How long will fund equity last in relation to structural deficit? How many jobs and/or programs can be cut before the district’s mission is compromised? What other structural expense reduction options exist that do not rely on program and job reductions?
In our district’s case, since 2008-9 we have seen structural revenue loss of $9.2 million, or roughly 9% of our General Fund budget. This means we would need to find a commensurate reduction in our expense structure to avoid a perpetual state of deficit.
Meanwhile state mandated retirement costs have added $4.6 million in structural cost. Add the revenue loss figure and it’s a $13.8 million structural problem. Using a variety of measures, most of them painful, we’ve been able to find just over $9 million in structural expense reduction. But simple math reveals a $5 million structural deficit remains. As a result, fund equity has also dropped.
This is was my second theme. It is archaic to view fund equity as the measure of a district’s financial health. Why? Because a district could have a high fund equity yet have a structural deficit and all the problems that comes with it. On the other hand, a district could have a low fund equity, yet have a structural surplus. Trend and trajectory matter much more than a point in time measure, which is precisely what fund equity measures.
The contracts the Grosse Pointe Public Schools Board of Education ratified with our employees anticipated this very problem. They bind employee compensation to our district’s structural financial position. This march towards operating equilibrium begins when fund equity drops below 10% of annual revenue, a point we knowingly breached as we concluded the 2011-12 fiscal year. Compensation reductions will follow now and by 2013-14 the district will run a structural surplus. Fund equity will return to the targeted 10% level shortly thereafter.
This was my third theme. Structural expense reduction, required in light of structural revenue reduction, is more favorably achieved through compensation reduction than program reduction – if we believe in the efficacy of the programs we have in place to service the education and developmental needs of our students. Examples abound of other districts seeking structural expense reduction through a variety of means that were soundly rejected by our community and, ultimately, the Board of Education.
The list is painful to recall, but important to remember – especially for those who now charge that our current fund equity levels are irresponsibly low or for those who say we have not done enough to cut expenses. This is the “Mythical Alternate Reality” referenced in the presentation’s title. When you hear this criticism, ask this simple question. How would you propose to identify a multi-million dollar structural deficit of minimally $5 million and as high as $9 million?
My answer is a matter of public record. It is my support of employee contracts discussed above. These represented a substantial financial investment that hastened the consumption of fund equity. Why would I have been willing to support that? Because I had long term protection against the greatest threats to local school district budgets in Michigan, dwindling state revenue and rising state mandated retirement costs.
As I recounted, this does not mean we cannot or shouldn’t evaluate other means to reduce expenses other than relying solely on compensation reductions. I offered four areas to consider:
- Enrollment. Student enrollment is everything to local school district budgets. Our district has lost enrollment at a pace greater than districts with similar characteristics. We need to evaluate our strategy to retain and grown student enrollment.
- Added Needs Instructional Costs. I detailed this in my analysis of the District Financial Benchmarking Report. Our costs have increased at twice the pace of the statewide average (on a per pupil basis) and at a rate 25% greater than our benchmark districts.
- Basic Instructional Costs. We have among the highest instructional salaries in the state, but we also have structured program offerings that are among the most expensive as well. We ought to evaluate both to determine if we are realizing the benefits.
- Professional Development and Substitute Teacher Costs. These matters go hand in hand. In aggregate, these total nearly $1 million annually. All parties appear to agree there must be a better way to approach these issues.
As Treasurer, I anticipate recommending that the district commence in these analyses immediately, essentially adopting a Budget Development Resolution six months earlier than has been our practice. At that point, all Board members and the community will have the opportunity to voice their support of various budget alternatives to determine if they are real or mythical.
GPPSS Financial Transparency Series_Fund Equity Alternate Reality