Preventing Future Shocks? MMSD Budgets: Past, Present and Future

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Curtis Mayfield, “Future Shock” (click to listen or download).

On Monday, October 26, 2009 the Madison Metropolitan School District Board of Education will consider and pass budget amendments and finalize the tax levy.  Most of what is before the Board are good solutions to a situation — cuts in state aid combined with a lower than anticipated allowable revenue limit —  that has no great solutions.   I worry that if things aren’t handled correctly there will be future shocks.

Although some information has been made and discussed in public over the last couple of months, the final versions were only released on the afternoon of Friday, October 23.

I note this for two reasons.  First, these are big decisions and the lack of timely information makes it difficult for members of the public to have any effective voice in influencing the Board.  Second, I really haven’t taken as much time as I would like to in studying and considering.  That said, I do want to thank MMSD personnel (in particular Board President Arlene Silveira; Supt. Dan Nerad; Asst. Supt. Erik Kass; and Director of Budget, Planning and Accounting Donna Williams) for making sure that my questions were answered over the weekend.

It is also worth noting that the local news coverage continues to be dismal. The only recent story I can find is this report from WISC-TV.

All budgeting involves looking at what has happened in the past, trying to take care of present needs and desires, and preparing for the future.  The desired outcomes for the school district should be (in order) providing quality and equitable education in the year being budgeted, preparing as much as possible to continue providing quality and equitable education in the future, and keeping those taxes you are responsible for (property taxes) as reasonable as possible.  These are interrelated and arriving at a balance requires taking a long view.

As long as the state school funding is insufficient and uncertain,  it will be  impossible to do any of these — much less all three — as well as the Board of Education would like to.   My initial thoughts on the scenarios the Board will be considering Monday are that the  present educational and tax related needs and desires have been reasonably well met but there has been little public consideration of the longer view — both past and future — and that the future might be more uncertain than it could be.

My concerns about the future and the past are linked by the biggest shock of the budget documents: $12.5 million was added to the Fund Balance equity in the 2008-09 fiscal year, increasing the equity by about 1/3 to $41.4 million (pp, 27-8 of the pdf).  This comes after a $6.1 million increase in the combined Fund Balances in 2007-8.  The (general) Fund 10  increase in 2008-9 was $11.2 Million (with some reserved for carried over expenses, I think).  In terms of the past, parts of the May Preliminary Budget and of the October Amended Budget address some of the causes of this under spending (or over budgeting), but I’m not sure they go far enough (I’m not sure they don’t either…more below).  In terms of both the present and the future, this level of equity opens up possibilities that I don’t think have been fully explored or exploited in the choices before the board.

Before going into more depth I want to say a couple of kind of philosophical things about how I approach this.

I’m a tax and spend person.  That means that what is taxed should be spent.  It bugs me when money is collected for something I believe in — like public education — and it is not spent.  This is money that could have done much good in improving education in Madison, instead it collects interest.  In Fund 10 alone we are talking about over $15 million in two years!  I recognize that a healthy Fund Balance has some benefits, particularly in terms of bond rating, borrowing costs and limiting the need for short term borrowing; but I also know that in April of 20o7  — a time when the Fund Balances had been shrinking and were about half of what they are now —  MMSD was given a AAA rating and that a Fund Balance which is large enough to eliminate the need for borrowing is too big.  I don’t think there are any simple rules for deciding how big is too big and how small is too small, but I’d welcome a chance to learn more.

That is one reason I also believe that extensive, fully informed discussions of Fund Balances should be part of the budget process.  This really hasn’t happened in MMSD lately.  The last extensive discussion was in April of 2007 when  ill-informed and over zealous conservatism swung the pendulum too far, which played  a big part in that $15 million in education funding going unspent (more on this in here).  At that time what discussion there was concerned keeping the Fund Balances from shrinking further; there was no deliberate or deliberated decision to grow the Fund Balances (that was the year schools almost closed, local class size reduction was slashed, class and a half special were instituted, special education was restructured for savings…).

Note that there is a different but not contradictory version of this history from the administration on page 27 here.

Since then, there hasn’t been much discussion at all.  As the preliminary budget was passed this May there was no documentation or public discussion of anticipated 2008-9 Fund Balances or surpluses, despite a statutory requirement that the Budget released prior to the mandated Budget Hearing “shall also show for informational purposes by fund all anticipated unexpended or unappropriated balances, and surpluses.”  I understand that in May you are going to be working with rough estimates, but that is better than total ignorance and no discussion at all.  The first public information I heard was a passing mention in August that it looked to be in the $7 to $8 million range.

Now we have hard numbers.  Now they have a chance to include this information in the budgeting, now it is possible to make  deliberate and informed strategic decisions about what the Fund Balance practices should be, about how to use the past as a guide for the present and for the future.  I really hope that happens on Monday (and if not Monday, sometime very soon).  This is part of avoiding future shocks.

Most of the rest of what I have to say is in the spirit of avoiding future shocks.  As I write this I am thinking of something then Superintendent Art Rainwater said at the time the district budgeting was moving in a conservative direction.  He felt he had to defend the aggressive budgeting that had resulted in consecutive years of the fund balance shrinking.  He said some things along the lines of what I had to say about taxing and spending above.  He also said (paraphrasing) the he didn’t believe that the insanity of Wisconsin’s school funding system would go on as long as it had and the promise of better budgets in the near future had contributed to the aggressive budgeting.  Art was wrong; getting the state elected officials to recognize the insanity  and act to bring sanity to school funding has proved to be  a more lengthy and difficult process than he imagined.

You have to be careful what you push to future budgets and tax levies; how the Fund Balances are treated could be a big part of this.

There will be at least some discussion of some Fund Balances at the meeting, because the May preliminary Budget,  Budget Amendments and Levy Adoption and the Budget Options to Reduce the Property Tax Levy documents all involve extensive use of the Fund 80 (Community Services, mostly MSCR and outside the Revenue Caps) Fund Balances and some use of the balances from other funds, including Fund 10 (the general fund).

The presentation of what is on the table Monday is somewhat confusing.  There is the Budget Amendments and Levy Adoption along with an Overview and there is there is the Budget Options to Reduce the Property Tax Levy, with an Overview.  Although the documents clearly state that nothing has been decided, this division creates the impression that Budget Amendments are rather set and that the only options are the “Options.”   All these are interrelated and I think good governance would be served by highlighting the choices being made in the manner that the Options are highlighted.

Most years this isn’t a big deal, but this isn’t most years.  As Supt. Nerad wrote:

On May 6,2009 the Board of Education was presented a proposed budget, approved amendments and adopted the 2009-10 budget. At that time the budget was built on our best assumptions known to us in the spring. Since the approval in spring factors have been finalized which we can know recalculate into our budget. These factors include finalizing salary and fringe budgets, a decrease in the Equalization Aid by 15%, a decrease in the Per Pupil increase on the Revenue Limit from $275 to $200, change in our Open Enrollment Out and In, Refinancing of Debt, savings on Short-Term Borrowing Interest, a decrease in Interest Earnings and increase in student enrollment.

The district has also received numerous grants, donations, and spending authority approval by the Board of Education since May.

There is just a lot more to be “fixed” than usual.

As I said above, some of the factors contributing to the unprecedented growth in the fund balance have been addressed and I believe that future budgeting will be more accurate.  These include the reductions in unallocated positions in elementary and secondary education done in the May budget and the proposal to lower the substitute and secondary teacher allocations that is part of the amendments being considered Monday.  These seem like sound budgeting.

Because of the timing of the budgets, other than these there are few direct “cuts” since the May budget.  By-the-way the new MTI contract seems have been largely anticipated and doesn’t appear to be responsible for any big changes either.  No future shocks there.

The biggest change (other than those related to reductions in anticipated revenue due to the  the state budget and the addition of targeted ARRA funding) is in the refinancing and rescheduling of debt.  The terms of this are already in place.  It was done to realize real long-term savings and to provide property tax relief in 2009-10 by reducing the debt service levy by almost $6.8 million.  If I read the document correctly, the real savings are $925,000 (maybe minus origination fees).  This means that almost $6 million in debt has been shifted to later years.  See this graph and part of a chart from the document.

debt chartThis is a case of the present desire/need to reduce property taxes being met at the cost of future budgets.

Decisions involving Fund Balances also weigh the present against the future.  The biggest move in the main amendments involves returning to the Partnership Plan idea of using almost $2 million of the Fund 80  balance to provide property tax relief.  At over $3 million, or about 1/4 of that total budget, the Fund 80 Balance is too high by most measures, this seems like a good idea.

If all of the initial amendments are enacted, the mil rate will be 10.40 an increase of .59 from 2008-9, translating into about $147 for a $250,000 home.  That’s a lot.

I can see why the Board wishes to explore options to further reduce the levy.  I hope as they do so they consider how these decisions may impact the years to come.

Past budgeting is ample evidence that you never know what the future will bring, but the last projections I’ve seen for 2010-11 were, in Erik Kass’s phrase, “ugly.”

How ugly? I’m guessing an budget gap between allowed revenues and cost-to-continue in the range of $3 to 6 million and the most recent projected mil rate was 10.91.  Big cuts and another big property tax raise spells trouble.  Beyond 2010-11 depends on state action (actually, if the WAES Pennies for Kids proposal is enacted, 2010-11 could be OK, state action again).

I think 2010-11 and beyond  need to be kept in mind as the Board considers options to further reduce the 2009-10 levy by eliminating transfers, contingency funds, the rest of the 2008-9 debt levy; deferring making up the taxes for the Walgreen’s reassessment and (this is the big one) forgoing collecting the maintenance referendum levy and the most of the maintenance that would fund.  Most of these involve pushing expenses to the future.  I’m skeptical about the wisdom of these options.

As I said above, the size of the Fund Balances offers some opportunities.  Of all the further options the one I like least is deferred maintenance, but I could support forgoing the levy if the projects were done using Fund Balance money and this decision was made as part of a longer term fiscal plan.

The Board should set some parameters for the proper size and uses of Fund Balance money.  They should at least be discussing if it is better to use that money now for property tax relief, reserve it to avoid future cuts and mitigate future taxes, designate it for special circumstances like Four-Year-Old Kindergarten start up costs, or leave it alone to keep the bond rating strong and the borrowing minimal.

As some of what is posted above indicates, I have opinions of much of this, but mostly I want conscious, informed, considered, public decisions to be made.  You can’t avoid all future shocks, but you can try.

[Note, this post is late, a bit incoherent and somewhat incomplete because a computer error led to much of a near final draft being lost.]

Thomas J. Mertz

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Filed under "education finance", Budget, education, finance, Local News, Pennies for Kids, School Finance, Uncategorized

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