There Is A Silver Lining
By Alex Saitta
February 14, 2011
Recessions Have A Silver Lining.
In boom times when revenue is growing significantly, companies will increase spending, often times in areas that don’t boost profitability much, if at all. For example, a restaurant owner, seeing his profit rise through the roof may order a subscription to Restaurant Weekly or hire a piano player for the bar. Why not? He’s making money hand over fist.
When a recession hits, revenue and profit falls. Since it is difficult to raise revenue in a recession, management will focus on cutting expenditures to boost sagging profits. It’ll do a top to bottom review asking does this person or item help grow revenue or profit? If so, they’ll keep it. If not, they’ll eliminate that expense like the subscription to the magazine or the piano player. What remains will be expenditures that directly grow or support revenue. Such reviews make the company more efficient, boost productivity and profits. This is why so many companies are recording high profits now, even though revenue growth is still very low. They’ve leaned their organizations and have become more efficient.
Opportunity For The School District:
A school district experiences the same growth in spending during economic upswings. According to the 2008 audit of the School District of Pickens County, enrollment rose 2.5% from 2002 to 2008. Total spending during that time rose from $111.2 million to $157.8 million or 42%. Some of that spending went to hire more teachers, some went to build new school, but a lot of non-classroom areas grew significantly and those expenditures did not contribute directly to improving the education of the children.
In 2010-11 district revenue will fall again, and should be about what it was in 2006. The district is facing a deficit next year in the $3.5 to $5.5 million range. This will put further strain on the system, in particular the classroom.
However, it does provide an opportunity to eliminate fat that has been added to the system and the district can no longer afford to carry. The solution is simple — focus the reductions in areas that least affects the education of the students, and the district can no longer afford to finance.
Two Key Questions:
To uncover those areas, I’m asking myself two questions during the budget process. One, does this expense directly impact the education of the students? If it does, it needs to be protected. If it does not, I ask the second question. Is this expenditure vital to what we do? If it is vital, it needs to be protected. If not, it should be considered for a reduction.
For instance, a math teacher directly impacts the education of children, so that expenditure must be protected. While a school bus doesn’t directly impact the education of a child, it is vital to the system because the district must transport children back and forth to school.
On the other hand, buying prepared food for employee meetings or purchasing LED signs for the front of the school to flash the time and temperature does nothing to educate the children, nor is it vital to what the district does. Eliminating such expenditures is the best way to cut the deficit.
Public Education Needs To Become More Efficient:
Now more than ever, public education needs to get more education out of every dollar it spends because it will have lower revenue growth in the future. For starters, Gross Domestic Product is on a slower path, so government revenues will not be as strong as they have been the past decade or two. I was reading a long-term forecast of a top Wall Street economist and he said 2011 is likely to be the best year of the decade in terms of economic growth, and he believes the second half of this decade will be weaker than the first.
Baby boomers who are nearing retirement will want a bigger piece of the government spending pie to go to medical care. Many of their adult children feel the same way, worrying more about the cost of long-term care for their parents. Twenty, Thirty, Forty and Fifty years ago, in their book, it was all about education, first for them and then their children.
Rising energy and medical costs will also take a bigger bite of the district’s budget going forward. For example, medical expenses are up 10.8% for the school district this current year. Obamacare will make that worse. Additionally the kwh rate on my electric bill rose 23% over the past two years.
As charter schools increase in numbers in South Carolina, there will be funding outflows from traditional public schools to charter schools.
While this recession and other changes are putting stress on the school district’s budget, this close examination of budgets provides an opportunity to make the system more efficient, by focusing the reductions on spending that is not vital or does not directly impact the education of the children. If school district does that, it’ll be able to operate and thrive in the more fiscally challenging environment that lies ahead.