Pattye Benson

Community Matters

T/E Fund Balance … Panacea to District’s Budget Shortfall?

The Tredyffrin Easttown School District School Board is contending with decreased local revenue, higher health insurance costs, increased contributions to the state pension fund, and diminished state and federal revenue. These problems do not make TESD unique; school boards across Pennsylvania are facing the same issues.

To suggest that Pennsylvania school districts are challenged by the financial crisis would be an understatement. As School Boards struggle to balance their budgets amidst these challenges, there is unprecedented concern as they look for solutions.

In TESD, the teacher contract talks continue as a backdrop to the ongoing budget discussions of the school board. With the current teachers’ contract set to expire on June 30, 2012; we are starting to see the battleground lines drawn in the sand. I am beginning to fear a “us versus them” mentality is developing. Many of the comments on the last Community Matters post were focused on the health insurance benefit plans of the teachers. I have to believe that the T/E teacher’s union TEEA accepts that the district can no longer afford to sustain their members’ health care plan at its current level – simply not possible.

Teacher unions fight for their members’ financial self-interests. To be clear, I do not have a problem with that motive – after all, isn’t that the primary reason ‘why’ a teacher would join TEEA and pay dues. Some may suggest that it appears that both TEEA and the school board are more focused on the money than the education. Let’s hope for the benefit of the District’s children, that conclusion reached by some is incorrect. Many of T/E teachers are also residents and parents. TEEA may be hoping to keep their benefit package intact but I have believe that the quality of the district’s educational program is every bit as important to most of its members.

Monday’s School Board meeting should be an indicator to the community on whether the teachers and the School Board are working toward the same goals or not. A couple of important topics for discussion at the meeting will be demotion and increased class size. I have previously written that increasing class size by one or two students may not be a problem, but could this be seen as the beginnings of change to the quality of TESD education? Increased class size may mean that teachers cannot focus as easily on individual students’ needs.

Just the talk of ‘possible’ demotion in TESD for economic reasons, is sending a negative tidal wave to TEEA. It is worrisome that the professional staff may be feeling devalued based solely on this budget strategy discussion. According to a recent TEEA press release, “T/E Teachers Willing to Help Create a Financial Bridge to the Future” the teachers union fully understands the District’s financial crisis and has prepared an ‘extremely reasonable solution’ to the School Board. However, according to TEEA, there has been unwillingness on the part of the School Board representatives to discuss their offer. The article further states that if demotion in the District moves forward, it is likely that some of the teachers will be forced to seek employment elsewhere. In reading the press release, I bought into this part of their argument.

However, the following paragraph from TEEA caused me pause,

At the same time, the Board has made assumptions about our future financial condition based upon many worst-case scenarios. They assume no future revenue growth, continued real estate decline, and continued lack of state and federal funding. These assumptions ignore significant increases the district made to its reserve fund in the past year. A more reasonable projection would account for an improving employment rate in Chester County, a real estate market that is beginning to rebound, and other indications of improving economic conditions.

To be fair to the School Board, they would not be doing their job if they were not realistic in their budget projections. Governor Corbett has focused his blame for the current budget crisis in Pennsylvania schools solely on the shoulders of local school boards. With Harrisburg’s major public education funding cuts, it is precisely the school board members who are now mired with this mess as the state pushes school funding responsibility on local school districts. I believe it is a bit quixotic for TEEA to suggest that the School Board should take a more positive (unrealistic?) approach to improving economic conditions. I am all for taking the ‘half glass full’ approach to situations but its needs to be tempered with realism. Rather than ‘worst-case scenario’ as suggested by TEEA, I hope that our School Board is attempting to be realistic in their projections.

In the latest TEEA press release, ‘Teachers Hope for Open Dialogue, Ask Community to Share Voice’, they offer a list of questions for community members to ask at Monday’s School Board meeting. Much of their focus is on the District’s fund balance, and the suggestion that the reserves be used to fund the budget shortfall. According to the TEEA, our school district currently has a reserve fund that is 26% of revenue, whereas other local school districts have fund balances of 8% to 10%. TEEA states that the PA School Boards Association recommends a balance no greater than 5%.

I believe that TESD has the largest fund balance in the state – someone please correct me if this wrong. And since the fund is taxpayer’s money, do you agree with TEEA and that a buy down from the reserve is in order to help fund the 2012-13 budget?

However, what are the repercussions, if any, with this approach for future budgets or future emergencies? Moving forward, you don’t know when a roof is going to need major roof repairs or a school boiler is going to need replacement. Few school districts have amassed anywhere close to the significant fund balance as TESD. Maybe we should view 2012 as an ‘emergency’ and with that approach, use the fund balance as TEEA suggests.

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  1. TEEA states that the PA School Boards Association recommends a balance no greater than 5%.
    Not so. A more accurate statement would be, “the PSBA recommends a balance no less than 5%.

    From the PSBA web site:
    Q. Are there formal guidelines or standards for a Fund Balance?
    A. Guidelines that exist offer three different methods. One relies on a formula where a predetermined number of months (usually one to three months) of operating expenditures are used. The other is used by the three major bond rating agencies – Moody’s, Standard & Poor’s, and Fitch. The rating agencies recommend between 5% and 10% of current period operating expenditures (budget). Section 688 of the school code says that when the fund balance exceeds between 8 and 12% of expenditures, depending on the size of the budget, the district must consume any fund balance in excess of 8% prior to increasing taxes.
    Q. If a fund balance exceeds the established guidelines or board policy, how should the funds be used?
    A. If the unreserved fund balance exceeds the standards set for the district, the excess funds could be used. Use should be limited to one-time expenditures such as capital equipment, vehicle replacement or any other nonrecurring expenses. An alternative use of excess fund balance is to transfer the balance to capital reserve for future building repairs. Additionally, the excess funds could be designated for some specific future use as determined by the board. Because the use of a fund balance is equal to one-time revenue, the expenditure should be a one-time expenditure.

    1. The restriction on raising taxes (if I remember correctly) only applies to un-restricted fund balances exceeding 8 percent of budget. Funds designated for a particular use do not count towards the 8 percent. Keith, it has been a while so correct me if I am wrong, but I seem to remember having this discussion a couple of times when we were designating funds for various uses.

      1. You are correct. TE has put most (all?) of their money in the Designated Fund Balance to be used, if I remember correctly, as a PSERS stabilization fund. The Designated Fund Balance is not subject to the 8% limitation.
        From the PSBA web site:
        A fund balance can be divided into three parts called 1) restricted, 2) designated and 3) unrestricted – undesignated fund balance. A restricted fund balance is earmarked for a special purpose, such as pre-payments, and inventory or other liability. A designated fund balance, is an amount that has been specifically set aside by the School Board for some future action such as to permit phase-in of increased retirement costs, increases in health insurance premiums or any other purpose the board deems appropriate. An unrestricted fund balance is available for use. The rating agency or formula calculation should be applied only to unrestricted fund balance. In the case of the School Code provision (Section 688) the limitation applies only to the unrestricted – undesignated fund balance in the general fund.

        1. I knew a good bit was designated for psers. Also, since a tax increase is proposed, the undesignated portion is under 8 percent. That raises another point – there is not very much fund balance left to use as the union would like. It would not be prudent to use the fund balance for current operations anyway. I think the whole discussion is moot. The focus needs to remain on the next contract.

        2. The $30M fund balance is a curse. The union points to it as a source of funds for their compensation, but this breaks the one-time expense rule. It’s a great sound bite, but invalid. The board points to it as a PSERS stabilization fund, but as Ray has pointed out earlier, PSERS also breaks the one-time expense rule. (PSERS is an ongoing large multi-decade expense) Following Ray’s suggestion, I’d wait until 2015 when long term bonds can be recalled and return most of the fund balance to the public (reduce debt repayment expenses) over a 15 or 20 year period.

  2. Thanks for your reporting on this and other local issues Pattye. You are quickly becoming a key information source for myself and hopefully others on these topics and your efforts are appreciated.

    In response to your question, as a parent, taxpayer, and concerned citizen, it sounds to me like an “all of the above” approach to solving this problem would be best. Perhaps the board could update their projections to reflect continuing albeit modest recent improvement in the economy, the union could adjust their expectations a bit, and yes using at least a portion of that reserve sounds prudent as a means of lessening the pain as we adjust to what is likely to be “the new normal” for at least a while to come.

    Paul Eisenberg, Paoli

  3. Pattye,

    That is an excellent post and very balanced. I was always taught to hope for the best and prepare for the worst. The union wants to discard that latter I guess.

    Has the union submitted a health ins. proposal? Not that they should but since they are in the business of making economic assumptions now I thought they might have tried their hand at that as well.

  4. Thanks for this provocative post. Let’s all remember that the (mis)use of the federal stimulus to pay for recurring expenses is a major factor in the budget problems state and country wide. Any use of the fund balance in a similar way would create a bigger problem. If TEEA wants us to ask questions, what prevents them from disclosing their proposal? Are they inviting taxpayers to their meetings? Never presume the best. Our board is floating demotion because they have so few alternatives. The fund balance is designated for specific one-time items. Ask for the audit report.

  5. Hmmm…I’m not buying all of the statements in the TEEA press releases. If they have offered such an “extremely reasonable solution” then why wouldn’t the school board take it? The school board has made it clear that they need a new contract that is affordable now and in the future. And the TEEA press release says that the teachers voluntarily froze salaries last year. I thought I read elsewhere that they only postponed raises for six months and that they recently received their “frozen” raises at a cost of over $1 million to the school district and its taxpayers. I don’t know who to believe anymore.

    1. The freeze worked like this….For the first half of the year we got paid at the same salary rate as last year. For the second half we get paid at the rate we were supposed to be at this year….so the move meant that the district only had to pay 1/2 of the salary increases that were due for this year.

      Hope that clears it up.

  6. They deferred their raises for a semester. For the 7 members of the bargaining team, that resulted in $24,400. Not insubstantial. But indeed, they moved to the next salary step — just a semester late. (And yes, that means their raise for the 7 of them was $48,800 — deferred resulitng in only half for the year…but at the big number under status quo.

    And I agree Caroline — watch how the TEEA directs you to ask questions of the board….but they will tell you they cannot give you specifics and will not answer any questions.

  7. I keep hearing about the fund balance, can someone clear up for me where the money comes from? Is it a specific line item in the budget? Is it just excess income? And I guess my real question is why is the balance still growing when we are experiencing such budget woes? Thanks in advance.

  8. Balance of income over expenditures annually accrues to become the “fund balance.” Typically it built up because of variable revenues (transfer tax) exceeding the budgetted amount. Because it includes capital reserve, there is also a budgetted amount each year for contingency that if it doesn’t get spent, ends up as Fund balance. Our budget woes are because we have to tax based on expenses vs. predicted revenues. We absolutely can use the fund balance as a revenue source, but it’s non-recurring so results in a bigger “deficit” the following year when expenses go up or stay flat, but so do revenues. Our big issue locally is related to real estate because 1) reduced sales result in reduction of transfer tax revenue and 2) flat and foundering economy result in successful assessment appeals which means the revenue coming in goes down without any change in the tax rate. In fact, even with an increase in the millage, revenue can still go down if major appeals are won.

  9. First, we need to confirm that the fund balance is increasing. From the PDE-2028 submissions we can tell it is increasing slightly.
    From the line item Estimated Beginning Unreserved Fund Balance
    6/2010 $28,869,252
    6/2011 $29,561,816
    6/2012 $30,249,245
    Yes, it has increased by $1.5M over a two year period or less than 1% of the estimated budget ($100M) per year. In essence, the district has run a slight surplus each year – as they should. The district has done a great job of estimating revenues and expenses!
    I’ll try to answer your question, “why is the balance still growing when we are experiencing such budget woes? Inherent in your question is the desire to use the fund balance to pay for employee compensation increases so furloughs and demotions won’t be necessary. As per the PA School Board Association recommendation – Use should be limited to one-time expenditures such as capital equipment, vehicle replacement or any other nonrecurring expenses. Compensation increases are recurring expenses. Why should the fund balance be used only for non-recurring expenses? If it used for recurring expenses, eventually, in a few years, the fund balance is depleted and the subsequent budget will require either 1) a huge tax increase that will require a referendum or 2) drastic employee cuts that dwarf those seen to date.

  10. Well, I guess that was what you inferred from my question, but I was merely attempting to get clarity around where the fund balance comes from and how we could have budget woes and yet still grow our savings account, demote away as far as I am concerned, just don’t keep the savings away from the ax payers.

    Since we clearly can’t count on the surplus each year, but I can’t imagine that we truly need that balance to keep growing past its current levels, I wonder if either side in these negotiations would be open to including some amount of variable pay. The union gives on healthcare to a reasonable degree and the district includes what would amount to a bonus based on some percentage of any surplus from that year’s budget. I would think this gets around the unions concern about building a four year contract around ‘worst case scenarios’ since they would receive additional compensation if reality was more favorable. Has anything even remotely like that been tried in another school district?

    1. You can tell there are “budget woes” when –
      – the teachers have given up half their salary increase this year
      – the workforce has been reduced by 9% since 2009
      – the support staff (NIG) has given compensation concessions
      – the numerous cost reduction strategies have been implemented as per this document
      and the district can still only show a token (0.75%) surplus.
      Variable pay is a good idea. The devil is in the details.

  11. THIS district did a 6 year contract with only 3 years of salaries and the final 3 years of parameters, but that was when the union and the board trusted each other and the PSEA played little if any role. (3 contracts back I think?)

    1. That would be the 1998 contract that was in place when I was elected to the board in 1999. These were followed by contracts in 2004 and the current contract signed in 2008.

      1. Thanks Kevin. The parameters in essence triggered a variable salary in the final 3 years, but that was crafted by two people — a board member and a teacher/negotiator sitting at a computer and working through scenarios. His union trusted him and the board trusted their person.
        The devil indeed is in the details, as the variables in that contract included retirement “what ifs” and health care cost implications. The starting salary for teachers was taken off the matrix and steps were added each year. The increase was identified by dollars/ percentages, but then was allocated to the salary schedule AFTER it was spent on health care costs.
        When the board negotiated in 2004, they did it without regard to the history of the previous contract, and I believe inadvertently (and somewhat carelessly) gave back things that they did not recognize the value of.
        But again, past is passed. Not sure it’s even relevant to consider given the PSEA’s significant role in negotiations here. The 1998 was even done without a solicitor in place…and the TEEA leadership was VERY senior staff. The President of the Union was Paul Slaninka, who I believe now is on the board in Phoenixville.

  12. There are some good points here. I like Denis’ “some element of variable pay” idea, and I’ve advocated this to the powers that be. If the base assumptions turn out to be pessimistic, surely there can be a mechanism to allow all constituencies to benefit, notwithstanding TR’s and Keith’s good caveats. I also share the opinion that the district needs to transform its communication of the fund balance issues: how it originated, how it can be used, the very real liability for post-employment benefits, its relation to PSERS, the need to review the current policy, etc., etc.

    There’s a key factor behind much that’s at work here: the Act 1 index that limits property tax increases to the average of the percent increases in the Pennsylvania statewide average weekly wage and the Federal employment cost index for elementary/secondary schools. The implications:

    1. The less teacher wages go up today, the less tax money there will be for future increases. A disincentive for the PSEA to back off.
    2. Absent tax base increases, new taxes or an approval by voter referendum, the increase in total wages is limited to this index of wage inflation, plus or minus the change in cost of non-salary items. (PSERS and special ed covered by exceptions).

    Total salaries are over 50% of expenses this year. There is already a built in ~4% teacher salary increase for 2012/13.

    Note that the movement on the teacher matrix structure can increase total wage expense even if the values at each step do not change. The key variables here are the numbers on each step, the rates of retirement and the rate of certification/degree attainment. These need to be carefully analyzed and explicitly modeled and explained when communicating the impact of a new contract.

    Any contract that does not recognize the above arithmetic would be without foundation.

  13. I don’t understand your reference to a 2012-2013 increase. If they don’t settle, status quo doesn’t change their salaries as of now, does it?

    1. I don’t think so, I remember being told that if for some reason a contract wasn’t reached, salary stays at this years rate until a new contract is reached.

    2. After the deferral, the last year of the contract took effect midway through the current year, so the half the last annualized increase is also deferred until next year. Per the budget workshop, the average salary this year is $82,176, next year will be ~$86,000. In 2010/11 it was $78,568.

  14. I don’t think that’s how it works. The deferral represented a time shift, not a numbers shift. They made the 2011 number until Jan of this year, when they switched to the 2012 number. They are now at e 2012 number and that will not change. So their checks now are based on the 2012 negotiated number. Their salaries are now frozen at what they make now. The “average” is because it was split over two semesters, but you can use the 2012 schedule and the matrix from 10/15/2011 and figure the cost for the next fiscal year if there is no settlement. There was no money deferral — just a change to the next number was deferred.

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