Should School Districts (TESD) Use Fund Balances Instead of Educational Cuts and Teacher Demotions?

Should school districts, such as TESD use fund balances instead of educational cuts and teacher demotions?  The answer according to Governor Corbett and some other Pennsylvania lawmakers, is yes.

Tredyffrin Easttown School District has amassed an enviable fund balance – $32 million; one of the largest in the state.  There are those in the community that support the school board holding on to the “rainy day” reserve funds; primarily because of the dramatically increasing PSERS contributions over the next few years.  We understand that the traditional package of retirement benefits for state employees and teachers has become unaffordable and pension reform is sorely needed (and sooner rather than later).  I support the state switching to a defined-contribution model (401(k) type model) for new hires but that only prevents the underfunded-pension liability problem from worsening … the state has a current multi-billion dollar hole.  But unlike T/E, the state has no “rainy day” fund.  Trying to manage their budgets, the state’s pension crisis has pushed school districts across the state to the edge of the cliff.  There are those that praise T/E for the good job they have done in holding onto their fund balance in spite of the pension crisis.

But not everyone in our school district supports T/E holding onto the $30+ million fund balance; suggesting that this money represents past overtaxing and belongs to the taxpayers and should be returned. Then there is the teacher union’s position that the fund balance should be used before utilizing budget strategies such as demotion or increasing class size.  Some residents fear that as school district’s budget woes push them over the cliff, the state will look to Districts (such as T/E) to bail out their fellow school districts.

Governor Corbett has sent a message to Pennsylvania’s school districts; he believes that they should tap into their reserves instead of cutting programs or laying off teachers and staff. During a recent radio interview with Dom Giordana on CBS channel WPHT, Corbett said if school boards want to cut programs instead of spending more of their financial reserves, than the public should blame them – not his budget.  According to Corbett, “Well, I look at the reserves as – it’s a rainy day fund. And this is a rainy day – we are in a rainy day.” If you are a supporter of our governor, then the message to T/E school board would be no educational cuts, spend the fund balance.

Taking Gov. Corbett’s message for school district’s to use their fund balances, a step further are State Rep. Mike Vereb (R-Montgomery County) and Mario Scavello (R-Monroe County).  These two Republican lawmakers are developing legislation that would force school districts to use their reserve funds to balance their budget before they would be allowed to raise taxes.  Vereb and Scavello want to either limit the amount of money that districts can hold in their “rainy day” reserves or ban the school districts from raising taxes if the money needed to balance the budget is available (in the fund balance).

In an article on Watchdog.org , “Pennsylvania School Districts have Tripled Savings in 15 Years”, it was stated that Pennsylvania school districts have more than $3.2 billion in reserve funds. Data from the PA Department of Education indicates that the reserve accounts have nearly tripled from $1.1 billion in 1996-97 to more than $3.2 billion last year.

The article included an interesting table listing the largest reserve fund increases in Pennsylvania since 1996-97; Tredyffrin Easttown School District has the distinction of coming in 7th in the state.  In 1996-97, T/E had $4,333,661 and in fifteen years increased by more than $26 million to a current total of approximately $32 million.  Amazing.

  Largest Reserve Fund Increases Since 1996-97
  Rank District 1996-97 2010-11 Increase
  1 Pittsburgh $47,013,209 $148,871,185 $101,857,976
  2 Downingtown $183,005 $50,803,447 $50,620,442
  3 Abington $1,509,021 $45,937,675 $44,428,654
  4 Lower Merion $6,584,556 $43,405,136 $36,820,580
  5 Altoona $1,509,021 $45,937,675 $44,428,654
  6 Bensalem $1,674,721 $28,564,360 $26,889,639
  7 Tredyffrin-Easttown $4,333,551 $31,026,455 $26,692,904

 

 

 

 

 

 

Vereb is “furious to find that many of the state’s school districts that are crying poor and blaming the state for their fiscal problems are sitting on surpluses, including one that totals $148 million.”  Although Vereb supports school districts having an emergency reserve, he feels that the taxpayer is deserved an explanation as to why school districts with large fund balances are cutting programs and teachers and raising property taxes but refusing to use fund balances.  That’s the reasoning behind the legislation that he and Scavello are working on — forcing the hand of school boards to use their fund balances before raising taxes.

39 Comments

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  1. The governor is passing the buck. While I cannot comment on other districts’ fund balaces, ours is really not that large when viewed in light of projected budget deficits. According to the success and sustainability
    Email, here are the deficits for the next four years (the first number is gross, the second net after taking all allowable tax increases and exceptions under act 1:

    2012-13 $4.5 m ($1.5 m)
    2013-14 $8.6 m ($2.8 m)
    2014-15 $12.5 m ($3.7 m)
    2015-16 $16.6 m ($4.4 m)

    Cumulative deficit $42.2 million, reduced to $12.4 million after all allowable act 1 exceptions. All of a sudden $30 million does not seem like all that much. This assumes no further reductions in state finding, further decline in the economy, etc. It could be worse, if the economy actually declines more. Of course, it could be better if the economy dramatically improves. But based on what we have seen to date, is there any reason to assume significant improvement in the next four years? It may be too pessimistic to assume a further downturn, but by the same token it would be foolish to assume a great improvement. I submit that the only prudent course is to assume status quo and negotiate the next contract accordingly.

    Now, since the rationale for holding the fund balance is partly pension costs, and since pension is one of the act 1 exceptions for which the board can tax above the inflation cap, couldn’t the board use the fundbalance now and just tax more for psers? That argument can be made. However, in my opinion that would be very risky. Why? I have stated this opinion elsewhere on this blog, and is this: I do not think it will be easy for the board to tax to the maximum possible under act 1 indefinitely. There is the question of political feasibility. I think several seats on the board could be taken by anti-tax reactionaries. If five or more seats are so taken, you could have a board that will not tax to the maximum even if that results in serious education cuts. To avoid that scenario, the existing (more pro-education) board might want to temper tax increases to some degree. In that event, the fund balance set aside for psers would be critical – otherwise the money would have to come from program cuts. Moreover, it should be remembered that not all of the fund balance is set aside for pension obligations – there are other known benefit obligations as well for which funds have been earmarked.

    All things considered, I think it would be irresponsible to use the fund balance to pay for a contract that is not affordable under current and forseeable economic conditions. (the way the issue us framed in the post.above is misleading – asking whether funds should be used to avoid demotions and cuts to the program, when what is really going on is the idea of using the funds to pay for the contract, and if and when that is no linger affordable, cuts to the program would have to be made since the money has already been used to fund the teacher’s contract).

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  2. Another thought – also according to success & sustainability, the teea proposal adds additional deficit:

    2012-13 $.7 m
    2013-14 $2.2 m
    2013-14 $4.3 m

    Total $7.2 million

    Add that to the after tax increase cummulative of $12.4 m and we get $19.6 million, against a $30 million fund balance.

    Also, to clarify my remarks above, I am suggesting that a board could use some fund balance each year to reduce necessary tax increases while at the same time avoiding some educational program cuts. But that would require a “sustainable” (affordable) contract.

    Finally, please pardon typos – actually they result from doing this on an I- phone – it thinks it knows better what I want to write, and it is hard to catch since I cannot see the whole screen. So, if you are going to think I am an idiot (no doubt some of you will) please do so on the basis of my ideas, not my grammatical errors!

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  3. $6M of the fund balance is designated for retirement, pension payout (continuing obligations for some already retired) and sick leave cash out per the annual audit from 2011.

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    Kevin grewell Reply:

    Thanks! It is less than I thought for psers. So even if we accept the argument that we could use that $6 million (because we can tax for psers) it still does not get us very far.

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    township reader Reply:

    Not psers. Retirements and commitments for unused sick days and the retitement bonus in lieu of sabbatical for Act 93 plan.

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  4. Kevin,
    .
    You said, “I am suggesting that a board could use some fund balance each year to reduce necessary tax increases while at the same time avoiding some educational program cuts”.
    .
    That’s a very bad idea. The board would be “putting themselves in jail” if they used the fund balance for recurring expenses. Remember, multiple sources have warned against using the reserve fund for recurring expenses. AND the Act 1 cap adds another problem.
    .
    As an example, suppose the board agrees to the union’s demands and uses the reserve fund to balance the budget. According to the recent newsletter, the fund balance would have to be used in the following amounts.
    .
    2012-13 $1.5 m
    2013-14 $2.8 m
    2014-15 $3.7 m
    2015-16 $4.4 m

    That’s a total of $12.4m drained from the reserve fund. Now, suppose the reserve fund is where it should be and the board wants to start balancing the budget without use of reserve fund. What’s the required tax increase for 2016-17?
    .
    Let’s further suppose, optimistically, that all employees agree to a salary freeze in 2016-17 and expenditures are flat. There is still a $4.4M hole to fill. Raising $4.4M via RE taxes will require a 5% increase which is not allowed under Act 1. And that’s under an optimistic scenario. Deep personnel and program cuts will be required.
    .
    As has been stated before, use of the fund balance only postpones the problem. Procrastination at it’s best.

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    Kevin grewell Reply:

    Your point is well taken. I was however only suggesting possibly mitigating tax increases, not funding the whole deficit- I did after all point out that the fund balance is none too large when compared to $12.4 million. It was an idea predicated on my belief that taxing all the way to the max might be politically unfeasible. And I also predicated it on the premise of a much more affordable contract, and my personal preference not to cut programs further. Now, this is all for the sake of discussion – and may not be a good idea. I suspect a board would always like some flexibility, and I personally do not want to see a reactionary board elected – one that would not hesitate to cut from the kid’s end if that seemed necessary to them. I am not pro board or anti-teacher, I am trying to be pro-kid. Not an easy position these days.

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    Kevin Grewell Reply:

    Keith – another thought: Reps. Vereb and Scavello (above) would pass a law to force districts to do just exactly what you say would be a very bad idea – spend the fund balance for recurring expenses.

    Question – if districts all over the state raise taxes by the Act 1 inflation cap plus the exceptions from now on – how long before the legislature takes away the the exceptions? Things could be infinetly worse . . . .

    Do you think the legislators could not be so shortsighted? I wish I could be confident in their foresight, but I am not. I often get criticized for bringing “politics” (gasp!) into the discussion, but I see a number of scenarios in which the kids get the shaft. While boards, taxpayers, and teachers bludgeon each others brains out, Rome is burning . . . . .

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  5. One use of the Fund Balance would be to phase in a transition of committed strategies: eg: a ramp up in activity fees, an increase in employee benefits contribution, a phase out of certain programs.

    The Fund Balances Management policy is on the agenda for review and discussion at tonight’s Policy Committee, 6:30pm at the TEAO.

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  6. As I said previously, the school district has no business hanging on to $32 Million dollars even in good times. It is a fiscal irresponsibility. The SD needs to drop the fund balance down to somewhere around $6 Million. Return the money to the rightful owners; the taxpayers by way of tax reduction.

    Anyone that praises TE for maintaining a fund balance of this magnitude is nuts. My school district balance is at $3 Million on a budget of $118 Million budget. This budget surplus is a poster child of financial mismanagement

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    township reader Reply:

    no…it is not. Much of the balance is designated for specific uses. More than half came from a substantial bond in the past two years. Some of the money is truly an accrual.

    Using fund balance would create the problem attributed to the frderal stimulus funds. If you want it refunded to taxpayers, it cannot be tied to taxation. It would have to be a straight refund.

    Ray’s suggestions of using it to ramp up cost savings and revenue generation is a good one. Ray–perhaps you can outline the idea for the board. None of them are typically great with numbers suggested from the floor.

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    Ray Clarke Reply:

    FWIW, I did send this email to the Board:

    https://docs.google.com/document/d/1nPOFFKVJ8KljmP1G10Hr0UflqCC8PNtNWRWbs3G05Do/edit

    My suggestions may be more specific than they will have the stomach for.

    I should also have said that a history of the fund balance and a year by year listing of the key factors causing its increase will also be helpful.

    Maybe others can provide their suggestions also. The Policy is #3185

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    CJ of the Main Line Reply:

    It’s not all tax money. It’s also bonds. And a lot of it is allocated for specific projects, mainly capital. In previous years when the economics were not so poor, the district would under spend and/or over budget/tax in order to build the balance for these reasons. It’s a lot like saving up for a car, when you know your current car won’t last forever.

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    Kevin Grewell Reply:

    Actually, I would argue that it (the fund balance) is a poster child for foresight and prudence when facing a legislature hell bent on a short-sighted and irresponsible course. Act 1 is a Frankestein monster built out of dead pieces of the failed Act 50 and Act 72. Same failed ideas regurgitated and stitched together haphazardly with cat gut . . . . .

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  7. Kevin,
    I think Corbett and the legislators have forgotten about the Act 1 cap and the difficulty it imposes on using the fund balance or returning it to the taxpayers. Ray has mentioned returning the excess reserve fund to the taxpayers over 20 years by including it into the refinancing of the district’s bonds in 2015.
    .
    What would be quite pleasing to the electorate would be to lower the RE tax rate next year by about 25% and use about $20M of the reserve fund to make up the difference. That would get rid of the excess reserves in one fell swoop. The problem occurs in the subsequent year when taxes would have to be increased by 33% just to get back to even. The Board would have to use the referendum process, which would be exceedingly risky.
    .
    Another possible use of the reserve fund would be to pay teachers a one-time bonus (say $1K or $3K each) as part of the contract settlement. One time bonuses have advantages and disadvantages. A bonus is a one-time expenditure – it’s not added onto the matrix and disappears in the subsequent year. No PSERS “tax” is required on the bonus by either the district or the employee, but the bonus does not count in the calculation of the high 3 years salary.

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    Ray Clarke Reply:

    One of the disadvantages of using the fund balance for a teacher bonus may just be taxpayer outrage at the use of their surplus tax dollars for yet more teacher compensation! The corresponding contract would have to bring great long term benefits to the District and be sold very hard.

    The fund balance issue was given short shrift at the Policy Committee. Kevin Buraks, the chair, had to leave to proceedings to Betsy Fadem, and were it not for Anne Crowley the subject would not have been raised at all. She, at least, has heard the residents’ concerns about the size and use of the balance. The current policy is four years old and leaves a lot to be desired, both in content and clarity. It looks to me as though it was written to be deliberately vague.

    The upshot is that the Fund Balance will be a topic on the Agenda at the upcoming Finance Committee meeting (6/11), and the Policy Committee will take it up in the light of that discussion at its next meeting on 6/13. Perhaps then someone will be able to explain to be exactly how those PSERS stabilizer millions actually work. Mood stabilizers for the Board? Like stabilizers on a cruise ship?

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    Kevin Grewell Reply:

    Keith –

    Giving the money “back” would only create a huge budget crater that would either have to be backfilled or huge cuts made to the program – as you point out. What people need to remeber is that it is taxpayer money, and any use of that money for legitimate obligations of the school district IS using that money to benefit the taxpayers. It has for example, in the past been used to reduce needed annual tax increases by some amount.

    I was OK with maintaining the balance while I was on the board because I knew that very likely a financial crunch would hit the district in a few years. It does create problems, particularly public relations/perception issues, but I would rather have to face this crisis with money in the bank than face it without a cushion. It is a “nice problem to have” in that sense.

    Act 1 was a very poorly conceived law – make local boards responsible without giving them the real tools they need to balance their budgets (such as level the legal playing field with the union), limit their taxing authority so that annual Act 1 tax increases will be taken every year to “build thebudget base” against the future possibility of a low Act 1 cap and ballooning PSERS payments.

    A stupid, stupid, irresponsible law . . . . . . . and we are seeing the results of it now . . . . . chaos and crisis, with no real solution in sight.

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    Keith Knauss Reply:

    Kevin,
    .
    I respectfully disagree with your characterization of Act 1 as a “very poorly conceived law”. Act 1 is finally bringing fiscal discipline to school districts. School district budgets in PA have swelled far beyond inflation (choose whatever index you want) simply because school board, before Act 1, found it easier to raise taxes than to bargain hard with their employees. Unfortunately there will be some pain (school boards, teachers, students, parents) while everyone adjusts to the new reality.
    .
    While it would be nice if there were some changes in the Law to “level the playing field” there is much more that boards can do without such changes – as we are seeing with the current negotiations.
    .
    PSERS is not a budget problem and is no excuse for school boards to tax to the max to “build the budget base”. The legislature has given board the ability to raise taxes by exactly the dollar figure needed each year to cover the mandated increase in PSERS contributions.
    .
    I see no practical use for TE’s large reserve fund. Maybe that’s why the board is having such a hard time articulating how they will use it. I’ll be interested in the reserve fund policy discussion next week at the Finance Committee meeting. It’s an albatross.

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    Kevin grewell Reply:

    Keith – we will have to agree to disagree about act 1. Also, taxing to cover psers does build the base- surely an unintended consequence of this poorly drafted law. For example, if we have a large psers increase one year, and we tax for it, and we do it again year after year, that tax base remains after the psers crisis is over, or am I missing something? Plus, despite a bigger base every year due to taking the psers exception, boards will take the act 1 index too.

  8. The ridiculous concern about fund balances across the state only reinforces how little those in Harrisburg understand. ACT 1 pretty much eliminated fiscal discipline. Knowing boards could not tie expenditures to revenues to stay balanced, countless districts simply applied the Act 1 limit whether they needed the revenue or not—to build up (pad?) the tax base in preparation for this long anticipated/projected PSERS explosion…remmmember Act 120 ? has reduced the projected spike by a major amount. Law of unintended consequences…and a legislature that runs every 2 years in an aging state with property tax reliances that asks voters their opinion abbout how much local schools can spend.

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    Kevin Grewell Reply:

    Andrea –

    Regarding the legislature not having a clue – as we used to say in Erie PA “You got that right!”

    The legislature would force the boards to use fund balance for recurring expenses, and when they have spent it all, then what? Referendums that will be defeated? Huge program cuts? Large tax increases? What?

    Actually, when considering the legislative landscape over the past decade, I am sure many local board members were thinking that the only responsible thing to do (assuming a duty to preserve and provide quality public education) was to build a fund balance – precisely because it was clear quite some time ago that the legislature intended to leave the boards on thier own whithout the tools to do what they are mandated to do . . .

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  9. Just read that lower merion is adding iPads for kindergarteners. Radnor is adding full day kindergarten. Where did t/e do it differently (wrong)? And how can we get back to a place where we can compare ourselves to those districts (instead of upper Darby who is cutting the arts?)

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    Kevin grewell Reply:

    One thing – all day k – we don’t have enough classrooms for that. It would require adding on to all existing elementary schools, or building a new facility, either a kindergarten center or another elementary school.

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    TM Reply:

    My comment was not really about the specific programs, but why LM and Radnor can add to their schools while we are cutting programs? Specifically what did they do differently that they are able to ride this out on top and we are struggling to keep our community from scratching each other’s eyes out at the bottom?

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    Kevin grewell Reply:

    Tm – radnor and lower merino are not “riding it out on top”. They have all the same problems we do. And I would not assume they are better because they buy I-pads or choose to have all day k. We were ahead of both of them in the latest. U. S. News rankings (see recent blog). They spend a lot more and I don’t think a case can be made that they are getting better results. Also, I doubt very much their approach is sustainable – perhaps embracing such expenditures is a bad idea right now. It may be evidence not of board foresight, but in fact just the opposite.

    Keith Knauss Reply:

    Radnor is spending now and postponing the bill for future taxpayers by 1) use of their fund balance for recurring expenses and 2) use of an Early Retirement Incentive Program.
    .
    LM is spending now and postponing the bill for future taxpayers by use of their fund balance for recurring expenses.
    .
    It will be ugly in a few years for these two districts.

    TM Reply:

    Thanks for the clarification. I know it is not wise to trust the headlines, but when you compare the news for the districts it appears everything is “sunny” to the east.

    Bill Reed Reply:

    …or maybe have the foresight not to close 3 elementary schools in the 90’s…

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    Township Reader Reply:

    TE’s were closed by the 80s.

    Kevin grewell Reply:

    Something I pointed out when I ran for the board in 1999, and way before my time.

  10. According to the District’s Success & Sustainability presentation, Lower Merion also pays over $26K per student versus T/E’s ~$16K, and Radnor spends ~19K. Both also have millage rates about 20% higher. (14.6 versus 12.1) (http://www.tesd.net/cms/lib/PA01001259/Centricity/Domain/1024/PPT%20Presentation%20Speakers%20Bureau_rev_jan26.pdf – see slide 4). I have heard that the difference is due to facilities, but it would be interesting to know exactly what they are getting for the extra money.

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  11. To reiterate Roberta’s point above, Lower Merion and Radnor spend much more per student. For example, if you’re in LM, for the additional $10,000/year/student your high schooler can attend a shiny new school . And they’ll have iPads for Kindergarteners and MacBooks for every HS student (How’s that working out for you, LM? – see Robbins vs. LMSD).

    “What are they getting for the extra money?” Nothing – there is no indication that this additional spending or fancy buildings are resulting in higher student achievement. In fact, they consistently lag TESD.

    Doesn’t a school district have an obligation to the taxpayers to spend money wisely and in ways that add value?

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  12. Not to change the subject – but I just read something in the paper and it got me to thinking… If the class sizes are increased, as one of the proposed cost-cutting strategies, would that be an acceptable reason for furloughing teachers? I know there are specific reasons that districts are allowed to furlough – I am just not clear if increasing class size is one of them. Would this be a better option than demotions?

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    Kevin grewell Reply:

    Jake,

    If memory serves, I don’t think you could let teachers go because you decided to alter your class size policy. I have not looked at the enrollment projections, but I think where the savings comes in is you hire a few less teachers thereby letting class size increase. When I was on the board, we were in a period of enrollment growth. You needed a certain number of additional teachers each year, call that “x” number of teachers, and to keep class size small you would add “y” more teachers. Unless I am mistaken, the current idea is to hire fewer teachers by altering the class size policy, essentially stop at “x”.

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    Kevin Grewell Reply:

    A point of clarification – the class size policy was never formally revised. The implementation of the policy was changed, resulting in smaller class sizes. Also, my comment (above) is a bit too complicated – how it works is this: the number of teachers you need to hire is determined by applying the class size policy(as implemented) to the number of kids you expect to have in any given year.

    The reason I have two numbers (x and y) is because in my day we were implementing a change, and when we were briefed by the administration we were told the number of new hires necessary to cover enrollment growth under the old class size policy, and then given an additional number necessary to cover the new smaller classes. I still tend to think of it in terms of two separate numbers. The reason I for one wanted to know this was because most of the additional teachers we hired were necessary to cover enrollment growth even under the old class size policy, so if someone wanted to know why we were hiring all those new teachers for class size, I could answer (for example) that while we were hiring 4 teachers for a given grade level, 3 of them were necessary for enrollment growth under the old way of implementing the class size policy, and 1 was for the new implementation to reduce class size.

    I think the projected savings by using this strategy in the current budget was something like $345,000. The figure should be available in the budget development documents on the TESD web site.

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  13. THis is progressive propaganda. Obnoxious as the rightest of right wing pablum.. Soon as I saw “progressive” on top I decided not to consider it. Closed minded? Sort of like “progressives” in their indictment of “tea partiers”..

    Signing out for the summer. Aides back. Good local action with help of this blog.. But the cliff is near for some of us on this space, Good day

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