By Alex Saitta
October 3, 2015
The school district’s external auditor presented the results of the 2014-15 audit to the school board at the last meeting. The news has been good in the short run, and threatening in the long run.
The district’s 2014-15 budget ended the year in surplus of $3.8 million. $1.4 million was due to unexpected revenue and $2.4 million was due to actual spending coming in less than budgeted spending. Unfortunately, $3.3 million of that surplus was spent on building maintenance and equipment. Rising building costs continue to eat up the budget.
Savings increased $550,000 in 2014-15. It is safe to say the district has built about $4 to $5 million in savings. This is a far contrast to 2010 when the district was facing a $2.75 million deficit and had negative savings, having to borrow money to meet payroll late that year.
Total spending this past fiscal year was $193.4 million — that’s $11,690 per student.
Combing through the 102 page audit, total debt of the district is $303.1 million. That is down from the peak of $382.5 million in 2007. In 8 years about 20% of the debt has been paid off.
Under the stress of rising retirement costs, the contribution the district pays into the state pension plan has risen from 8.05% in 2007 to 10.75% in 2015. The district paid $12.3 million toward pension system last year. As the system continues to bleed, the state is asking taxpayers as well as employees to pay a higher percentage of their income/ pay in to prop up the pension fund.
This year’s audit provides insight into the pension system, and shows how much risk it has taken on the last few years. About six or seven years ago you can remember a referendum where voters gave fund managers the ability to invest pension assets in stocks and other investments. Looking at the state pension, 31% of its assets are now invested in the global stock markets. It has another 31% invested in even riskier assets like hedge funds, private equity and debt as well as commodities. It is assuming a 7.5% annual return for the next 30 years. (Good luck on that.)
The district’s portion of the liability for the state pension plan is $142.7 million. If actual investment return turns out to be only 1% less, the district liability will rise by $42 million.
Why The Good News:
The budget is still generating surpluses and building savings, naturally on its own. This is due to five primary reasons:
1) Unlike surrounding school districts, our school board bit the bullet and actually made permanent reductions in spending in 2010 and 2011. As a result the budget was not only balanced those years, but in years to come.
2) As the economy rebounded and new revenue started to flow-in in 2012, 2013 and 2014, the board limited annual spending growth.
3) A by-product of this fiscal austerity was it altered the culture by making every employee more cost conscious. If you look closely at the audit you’ll see that by-product in dollar terms. Actual spending for scores of items were below budgeted expenditures, again this past year. So it is not surprising extra money is just turning up in the form of annual surpluses and rising savings. The district leadership and employees have done a good job of keeping actual spending under budgeted spending the past few years.
4) The economy is now in the 7th year of its recovery/ expansion so revenue has been growing steadily for years now. The TIF lawsuit has helped boost revenue growth as well.
5) While I didn’t agree with this because it will hurt academic performance in the long run, about 55 teaching positions have been eliminated the last two years, and that has created savings.
Looking Just Ahead:
The recent past looks good. Looking ahead we won’t know until next year, what this year’s budget has done to the district’s financial condition. Likely it will put a dent in it — due to overspending in the 2015-16 budget — the budget is in deficit for the first time in five years.
Plus, I’d be surprised if the economy continues to grow without a recession at some point.
Finally, people see these surpluses and savings and think, we have to spend that money now. You are seeing a bit of that creeping into the discussion, but I’m leaning against that because savings will come in handy when the next recession hits, and revenue drops and the district is looking to plug a deficit. Plus continued overspending is a sure way to wipe out the cost conscious culture we’ve created the last five years, that has paid financial dividends for the district in 2012, 2013 and 2014.
The system has $300 million in bond debt. Probably $250 million in a pension liabilities, given stock market returns are likely to be short of 7.5% a year. Blue Cross Blue Shield is asking for 35% increases for their ObamaCare plans. They’ll never receive that increase from the government, and likely will turn to their other plans (like our government medical plan) to subsidize their ObamaCare plans as those costs rise. The audit doesn’t list what the district’s long-term medical liability is, but it is undoubtedly high (probably north of $200 million) and going higher.
In 2008 or so I said the district like the rest of government, most individuals and many businesses was facing a slow financial strangulation. Economic growth is on a permanently slower path. As a result revenue and incomes are on a similar slower path. The new normal. Inflation is just as high or higher, so only a few are getting ahead on a real basis and most are falling behind. For individuals food inflation has been eating up their income. For the district it is mostly rising building costs, retirement costs and medical costs.
We managed to balance the budgets of 2010 through 2014 with new revenue growth, and better budget management mainly cutting non-classroom expenditures — my advice was taken to a degree.
This last 18 months or so there has been a shift and they’ve been eliminating teaching positions to balance the budget. This year they went as far as balancing the budget by funding a recurring expenditure (that third teacher pay raise) with savings or one time money. Those leading this new path need to hope and pray the economy continues to grow and generates new revenue or this overspending will catch up to them in rather quickly.
Looking at the long-term, the school district (like most local, state and the federal governments) look about the same — facing mounds of debt and staggering financial obligations over the next decade or two. Mortgaging the future is just the way our government operates now-a-days.