#427 Future Finances, pt. 2
Last week we used the fictional life and finances of Johnny Applecore to explain big picture finances of a school district. We said that his savings account for home repairs is like the Capital Reserve account of a school district and the money he had at the end of the year after all expenses were paid, was like a district’s fund balance. We learned that his annual “profit” was based on how much money he earned and how much he spent. When Johnny, who works on
commission, had some consecutively bad years, he had to use up all the extra money he carried forward and began to drain his savings account.
When a school district gets to June 30, we know at that point if our expenses and income were as projected in the budget or if we’re going to have to decrease the fund balance to cover the year. If our income exceeds expenses, we’re able to maintain a capital reserve fund to cover projects such as the Edinboro roof, HVAC and window project that cost $5 million. A “profit” or break even at the end of the year, helps us keep a healthy fund balance for the lean years. So
this week, I will use the 2019-2020 projected operating budget to see how it is becoming increasingly impossible to avoid using fund balance.
A simple way to look at a budget for the next year is to determine what revenues will increase for the next year and what expenses will increase. Obviously, if your expenses are projected to increase more than your revenue, you will run a deficit. So let’s take a look at projected increased revenues and expenses for next year.
It is important to note that for purposes of this exercise, I am using figures from our first draft budget. That budget is always the “worst case scenario” and I will tell you how we’ve worked on that budget to bring it closer to balanced later. The first draft budget showed that in June of 2020, we would have spent $733,000 more than we took in.
On the revenue side, we only expect $330,000 in additional revenues. We anticipate $30,000 of that will be from local real estate taxes created by the expiration of local LERTAs and $300,000 in additional state dollars from subsidies. So on the revenue side, without a local tax increase, we should see an additional $330,000 for next year.
On the expense side, we will be paying an additional $129,000 in pension contributions. This is less of an increase than previous years but we were also told the increases were supposed to stop a few years ago. We are anticipating costs for contracted professionals will increase $242,000. These contracts are for providing services to meet the ever-increasing mental health needs of children as well as the needs of special education students. We have been fortunate that, for a few years, we were bucking increased health care cost trends and holding the line pretty well; however, trends tend to be cyclic and our costs are increasing once again so we’re anticipating a $277,000 increase in health care costs. We’re also looking at $124,000 increase in equipment and vehicles (did you know a new bus cost $86,000 and we need 3 every year!?).
Just those expenses outlined above come to $772,000 which is $39,000 more than our deficit projected in the first draft budget. We can’t control the pension and health care costs, don’t feel we can function by ignoring the significant needs we’re seeing in students and have to keep up with vehicle purchases to provide student transportation.
In a school district, salaries and wages make up 45% of costs with the associated benefits and taxes consuming 29% of expenditures. Our projected increase for salaries and wages next year is $382,000. Considering these categories account for 74% of a 33 million dollar budget, they are huge budget drivers. Fortunately, the original $382,000 increase in this category has been pared down to $232,000 when we account for retirements. (new employees cost less).
So at our April 17 Board meeting, we approved a proposed final budget that showed a swing from the $733,000 deficit to a $246,000 surplus. That was done by cutting $459,000 in expenditures from the budget which brought the deficit down to $274,000. For purposes of the proposed budget, we put in a local tax increase at the full amount permitted by law. This would bring in $360,000 of revenue (and change a projected deficit into a surplus) if it remains in the final version of the budget.
Districts are required to adopt two budgets and the first one doesn’t count. The proposed final budget must be available for the public to review but isn’t necessarily your final budget which we will adopt in May. To be safe, we have opted to include the full tax increase in the proposed final budget to give at least another month to get in better estimates, see how current year spending is trending, etc. Ultimately, the School Board will decide how much of a tax increase (if any) to include in the final budget.
The point of all this is to outline the frustration we have trying to maintain a balanced budget. Pension costs, charter school costs, special education, transportation, and health care costs are not in our control. State revenue is not in our control. All things considered, we will probably be able to stay financially healthy in 19-20, but it will be increasingly difficult as the years progress.
Now, to make the final connection to last week. If the board decides only to raise taxes enough to create a balanced budget, there will be nothing to put into capital reserves for the necessary capital projects. (One example of a necessary capital project is the roof units at the high school. They are at end of life and we will use them as long as we can, but when they go, it is a $200,000 cost to replace each and we may need as many as four.) So, to keep up with the
always present building repairs, we will transfer money out of the fund balance for capital improvements. If there is no tax increase, we will additionally transfer funds from the fund balance to balance the budget. As we saw in the story of Johnny Applecore last week, that puts us on a trajectory that does not end well.