Brendan P. Walsh

Before diving into the 2021-22 audit analysis (spoiler alert…. it’s not pretty) let’s review the relationship between budgets and audits. Then let’s review how and why budgets are amended after their initial adoption.

A budget looks forward. It is an investment plan. It memorializes how a district will invest taxpayer dollars to realize its objectives. In Grosse Pointe those objectives are memorialized in the Strategic Plan.

The audit looks backward and reports on the district’s fidelity to the investment plan (among other things). It does not judge the effectiveness of investments or if strategic plan objectives were met. Other district quality controls must tend to that.

There is only one annual financial audit but budgets almost invariably change after initial adoption. In fact in two weeks the GPPSS will vote to amend the budget adopted in June. Why?

State law requires that budgets be adopted before the end of June – before key variables are defined.

• Enrollment is the big one. With tax dollars tied to student enrollment (about $10,000 per pupil in the GPPSS’ case) enrollment projections are critical to budget realization. In the GPPSS, missing enrollment estimates by 50 students swings a half a million dollars. As if making these projections was not hard enough, they must be completed by July. But schools won’t see student eyeballs until September.
• Closely related to enrollment is teacher staffing levels. In a declining enrollment mode, districts unfortunately layoff teachers. The GPPSS contracts historically require that teacher receive layoff notices before the end of April. If a district misses that window, or otherwise is too optimistic on enrollment, you have the double whammy of excess capacity (teachers) and lower revenues (fewer students).
• Per pupil revenue is commonly unknown at time of mandated budget adoption. In the GPPSS if revenue projections are off by $75 per pupil either way the swing is half a million dollars.
• Teacher progression on salary grids steps and lanes — including teacher retirements — are also unknown at time of budget adoption. How many will retire? How many will have recently earned their Master’s Degree and therefore a significant pay increase?
• Health care costs can have a tremendous impact for insurance self funded districts like the GPPSS. Even a single catastrophic health event can be multiple hundreds of thousands.
• New bargaining unit agreements. Odds are good that a new agreements defining teacher compensation may be ratified after budget adoption. A Board can run the risk of tipping their negotiating parameters by baking in additional investment into their budget.

It should be clear that making all of these projections accurately is no small feat. But just this week in our community I saw outcries about “missing the budget”. I am not saying it can’t be done better (addressed below), but walk a mile in those moccasins.

Let’s dive in more on that last bullet to highlight the dynamics. It had a significant impact on the GPPSS budget and audit in 2021-22.

In June of 2021 the Board was negotiating with the Grosse Pointe Education Association (GPEA) — the teacher’s union. Let’s also note that the GPEA “goes first” on the negotiations. Typically whatever deal they strike serves as the target model for the other bargaining units.

The GPPSS Board of Education and the GPEA did not reach an agreement until September 13, 2021 — months after the 2021-22 budget was adopted. As it turns out the agreement included a 4% pay raise for GPEA members. On top of this the district’s had to wait until the 2021 audit was completed (in roughly October of 2021 and well after budget adoption) to validate that the “Formula Clause” had triggered an additional payments (on top of the 4%) to employees.

Readers can judge the contracts and their impact for themselves, but all this illustrates that the impact (cost) of the agreements were not realized until after budget adoption. Should the district have baked that cost into the budget? And in that alternate reality, what other decisions could or should have been made?

Different Boards and administrations will have different approaches. No matter, as things transpired in the GPPSS (and revealed by the 2021-22 audit) the labor agreements struck after budget adoption increased district Instructional costs (i.e. mainly teacher labor costs) by $4.5 million. Factor the other bargaining units’ increases and we can estimate the new agreements total un-budgeted costs (at time of initial adoption) were about $5 million.

With that background, we can now return to our regularly scheduled financial audit analysis for 2021-22.

A new year is not a clean slate financially. Districts carry over the previous year’s financial result (operating loss or gain) into the ensuing year’s financial landscape. In 2020-21 the GPPSS ran a $3.5 million operating loss.

The Original Budget (adopted in June 2021 — with all the preamble above) anticipated that the carryover $3.5 million loss would shrink to a $2.2 million loss for 2021-22. Let’s remember that no one expected 2021 to be a “good” financial year. A $2.2 million loss was the budget plan.

Enter the new union agreements, the enrollment actuals, etc. and we have an entirely new set of financial variables. Let’s piece them together to see how the initially projected $2.2 million loss grew to a $5.2 million loss.

• -$3.5 million. The starting point of the 2022 budget. This is the operating loss from 2021 that gets carried into 2022.
• $3.3 million. This is the total of the cost reductions realized (and revealed) in the 2022 audit. Spending was reduced from $104.3 million in 2021 to $100.9 million in 2022. This is evidence that the district realized the cost cutting task and had some success in addressing it, but…
• -$5.0 million. This is the total revenue reduction from 2021 to 2022 that was not factored in early enough in the budget process. Enrollment loss is a factor here (although the audit does not provide the specific detail). There were also some one time revenues that hit in 2021 that did not repeat in 2022. However you analyze it, there was too much optimism on the revenue side of budget planning.

2022 was expected to be a bad financial year from the start, but in the end it turned out more than twice as bad as the Original budget had anticipated. So it is with the negative drag of 2021’s $3.5 million loss and 2022’s $5.2 million loss we enter the octagon for 2023.

No rest for the weary.

The administration’s 2023 proposal — really the revisions to the Original Budget that will be voted on November 28th – projects a balanced budget with revenues and expenses both equalling $103.7 million. This would be a welcome recovery from the last two years’ losses.

But is this possible?

On the expense side the administration projects $103.7 million — a cost increase of $2.7 million over 2022. With bargaining unit agreements negotiated last year delivering another 2% raise plus step and lane increases and inflationary impact on Purchased Services and Supplies, $2.7 million feels about right.

Revenue projections don’t feel right. Let’s review revenue for the last three years and recall that the biggest revenue drivers are enrollment (sharply declining) and per pupil revenue (rising):

• 2020 Revenue – $104.7 million (audited actual)
• 2021 Revenue – $100.7 million (audited actual)
• 2022 Revenue – $93.8 million (audited actual)
• 2023 Revenue – $103.7 million (budget amendment #1, an increase from $101.4 in Original))

Clearly one of these is not like the others. For the last three years General Fund revenue has dropped an average of $3.6 million per year. What evidence do we have to expect – and budget – for a $10 million revenue increase?

I’ve already gone on for too long here, but it speaks to the complexity of the topic. It is not easy to navigate the ship when resources get more scarce and public outcry rises. (Been there, done that… 2005 to 2012). It’s even harder to execute on plans that will require greater investment (e.g. launching a more robust skilled trades program, re-opening schools, etc.)

But one thing is certain – and here comes my unsolicited advice. The district must get more pessimistic in its budget planning assumptions. The evidence supporting this is screaming from the last two years’ results. Assume lower enrollment. Assume higher employee compensation. Assume higher health care costs. Build the budget accordingly and if reality comes in better we’ll gladly take it. Let’s quit doing it the other way around. It hasn’t worked.

And while I am on my soapbox, this gets to the heart of an issue I heard in the recent school board campaigns. The school board has a responsibility to the taxpayers to challenge and vet the administration’s financial assumptions and recommendations. The Board is not an impartial observer. The Board is the very body with legal authority to spend taxpayer dollars. Respect for the knowledge and skill of the district administrators is not mutually exclusive to the ultimate responsibility the Board has to taxpayers.

An optimistic position the newly convened Board might take is that a $5 million structural deficit needs immediate attention. A pessimist might peg it at $10 million. A pragmatist might be in the middle. We’ll soon see what our new Board’s disposition is.

And if it were not clear enough already, I would advise the Board on November 28th to reject the proposed budget amendment and request – as a united Board – a revision that delivers at least $5 million in cost reductions – to start.