Pattye Benson

Community Matters

TE School District has Multi-Million Dollar Budget Surplus … Again!

There was more to the June 17th TE School Board meeting than the Board’s approval to cut the hours of aides and paraprofessionals. With a 7-2 vote, the Board passed the District’s 2013-14 school year budget – Anne Crowley and Rich Brake dissented.

For another year, the District ended the year with a budget surplus – a year ago, it was a $3.9 million surplus and this year the surplus is higher, possibly as much as $5 million. School board member Betsy Fadem defended the surplus, explaining that much of the surplus was due to one-time money situations. Fadem’s logic may have been more convincing if it were not for the nearly $4 million surplus from the year before.

I understand that budgetary changes occur during the school year but the $8-9 million surplus of the last couple of years doesn’t balance well for me given recent Board decisions like the cutting hours of employees to avoid paying health insurance or the proposal to charge Valley Forge Elementary School neighbors a fee to use the tennis courts. How is that property-owning nonprofit organizations in our community are targets for District revenue or that taxpayers see an increase in their tax bill yet the school district has a yearly budget surplus of multi-millions? This isn’t a few hundred thousand dollars in surplus, it’s millions!

My guess is that the teachers are paying very close attention to the District’s $8-9 million budget surplus that has occurred since the signing of their last contract. The TEEA contract is up June 2014, which means that contract negotiations are just around the corner.

Neal Colligan addressed the recently passed TESD budget in the latest issue of the Main Line Suburban. Here’s his letter to the editor:

To the Editor:

Lost in last Monday night’s report on an emotional Tredyffrin/Easttown School Board Meeting was the economic news of the evening. This related to a summary of this year’s projected results and the adoption of budget for the 2013-14 school year.

As was announced the prior week at the board’s Finance Committee meeting, the district should see operating results this fiscal year that will show a surplus of $4 million to $5 million. Fiscal year 2011-12 (last year) ended with the district in a surplus position of $3.9 million. This is total surplus for the district of $8 million to $9 million in two years. It’s important to remember that the district imposed the maximum tax increases allowed in the Commonwealth (without voter referendum) in each of the last two years. These two tax increases totaled about $6.5 million in new revenue for the district. We were told that this was what was needed to educate our children in the next school year. The budgets adopted for those two fiscal years were each estimated to produce multi-million dollar deficits; even with the tax increases imposed. The reality is that there was enough revenue in each of these years to effectively operate our public schools without any tax increase. Looked at another way, our tax increases only ended up funding surpluses. This is a disturbing, and now repeating, pattern.

This year’s budget also included a tax increase. The presentation of the budget detailed, again, multi-million dollar deficits even with the now-adopted tax increase. This budget, as in the last two years, passed the board but not without dissenting votes. As it turns out, these dissenters in prior years were right voting against tax increases as they were not “needed” to educate our students. The old adage comes to mind: fool me once, shame on you; fool me twice, shame on me; fool me three times…? Let’s all hope this is not the case.

You may be asking the next logical question, what happens to these surpluses? They are accumulated in the district’s Fund Balance. This accumulation account is designated for many things; past untaken vacation days; stabilization of self-funded health insurance costs and a PSERS stabilization balance. Up until last year, the PSERS balance was the largest designated balance in Fund Balance. But it has never been used to protect the taxpayer from the increased expense of PSERS (the biggest demon the School Board uses to justify tax increases). Rather, the largest withdrawal from Fund Balance was taken last year and used to fund the Facilities operation. $10.4 million was moved from the PSERS stabilization designation and moved to a new Capital Fund. Unusual? You decide.

As with any operating entity in the public sector funded by our tax dollars, citizen diligence and attention is warranted. So let’s see what happens to this year’s projections of multi-million dollar deficits. We all hope it doesn’t play out that way but as a careful watcher of recent financial results; I’m not too concerned. The District has been widely wrong in its doom-and-gloom budgets in the recent past. Plus, they now have another funding increase in the form of your increased tax dollars. Will it be needed to educate our children or to create another surplus for the District? We’ll be watching…like a Hawk!

Neal Colligan
Wayne, PA

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  1. I’d like to comment on Neil Colligan’s letter in the MLM news where he takes the district to task for budget surpluses over the past few years.
    The trust of the article is that the district is purposefully overestimating expenditures, underestimating revenues, over taxing the community resulting in an ever-increasing, unneeded large fund balance.
    First, let me state that the UCF district has run a surplus in 4 of the last 5 years, so we’re dealing with the same situation. Let’s talk about the factor that naturally drives a district to have a budget surplus and why it’s problematic to run a deficit.
    Why can’t you give $10M of the Fund Balance back to the taxpayers by running a deficit for one year?
    A budget could be proposed where, for one year only, the millage rate is reduced by about 11% and $10M of the fund balance is used to fill in the resulting “hole”. Great! The taxpayer gets a one year tax break and $10M of the fund balance is returned. But this creates a huge problem for the subsequent budget year. The district needs to increase the millage rate by at least 11% to get back to where they were before and this requires a referendum. Imagine the disaster if the referendum was defeated. This illustrates the problem with deficit spending that is introduced by the unintended consequence of the Act 1 Index cap. The district might want to do what is best for the community, but they can’t.
    OK, I understand why deficit spending of $10M can’t be done, but why can’t we just plan for a neutral budget rather than one the produces a surplus of $3M of $4M each year?
    We have to understand that a budget is a guess in May as to what is going to happen many months in the future. The district has to guess:
    – how much will the state give the district when they set the budget at the end of June?
    – how many assessment appeals will there be?
    – will Vanguard win their tax appeal court case?
    – how many of my employees will incur catastrophic health care costs?
    – will the teacher’s 5 period grievance be settled favorably?
    – will the teacher’s contract be signed and under what terms?
    Keep in mind there is a big problem imposed in the subsequent year by the Act 1 Cap if the district guesses wrong and has to deficit spend. There is only minor grousing if the district runs a surplus. Thus, there is a natural tendency to always budget conservatively and run a surplus.
    Note: Before the Act 1 cap it would be possible for a district manage their fund balance by having, for instance, no tax increase for two years followed by a 5% tax increase in the next year. This is not possible with the Act 1 Index.

    1. Keith,

      The thrust (I think that’s the word you were going for…) of my piece was to point out to the community a financial pattern that has occurred in the District in the last two years. It was a Letter to the Editor of the local paper…an editorial observation…my observation. It is fact based and the members of the community can evaluate is as they see fit. Now it’s a part of this community blog…that’s fine. It’s in the public domain.

      You’ve made certain assumptions about my observation and went to some length defending questions not posed in the article. Again…fine. Public discussion is always helpful. You mentioned you had surpluses in your District in 4 of the last 5 years. OK, but if you accomplished that by telling your taxpayers that you were in dire straights by adopting 5 large deficit budgets (and increasing taxes aggressively); I hope someone in your community points out this pattern too. The good citizens of the UCF District can evaluate for themselves your pattern of budgets vs actual results.

      Budgets are proformas of future financial results. As such, they involve projections and estimates. My educational background is in accounting and I know budgeting can be difficult in uncertain economic times. I also know that those preparing budgets have wide latitude in making their estimates. Budgets can be made to paint many different pictures. You are correct that there are many reasons that budgets do not perform exactly as anticipated. One of those reasons is because the budget was bad at its inception. A School District budget is used primarily as a tool to levy taxes. What is the motivation (in terms of tax policy) of the budget creator? How does the budget historically perform compared to actual results? I hope the citizens of your community ask these questions too.

      But you’ve really helped me illustrate a larger point here. It’s really the attitude of those in the position of operating in the Public Trust with the authority to tax the community. There seems to be a real sense of “you really don’t understand the situation”, or “you have no idea how hard it is to manage these public entities”, and finally extrapolated to, “we really know what is best for your tax dollars”. That’s an attitude all to prevalent in governmental entities on many levels. I think I’ve been pretty clear on this blog that I reject that attitude. The tax paying members of this community are plenty smart enough to understand how many of our dollars are needed to efficiently operate our public institutions. They are also smart enough to evaluate the performance of our elected representatives. I imagine that’s the same in your community.

      My friend Ray Clarke and I attend all these finance meetings. He used to tweek me about the District’s “surprise” surplus. I wrote it off as a one-time event. But now we know it’s not a one-time event…now it’s been two consecutive surprises. Kudos to Ray… The community should be making these observations and asking questions and following the results. And the attitude of “We (on the Board) know better than you how much we need to take in the way of taxes…” is not an answer we need to live with. Andrea (another active member of these discussions here) repeatedly makes the point that we all need to vet our candidates for these offices fully. I agree. Change is coming to the T/ESB.

      1. Fund balances across the state have ballooned since 2006. By coincidence, Act 1 of 2006 was passed the same year.
        The reason that fund balances have increased may be that most school directors and administrators are nefarious characters with “we know better than you” attitudes content with overtaxing their communities. Or it could be that they compose a budgets that they feel are best for the community under the constraints imposed by the Law and the uncertainty of predicting the future. Some may think it’s the former; some the latter; some a combination of both.

        1. It’s also around the time School Districts started putting away money for coming PSERS increases. Good article, that was mentioned in the comments. Hey, the District wants to fill up its Piggy Bank…OK. Just tell the taxpayers. How long will we be paying in, for what purpose is the Piggy Bank being filled? Don’t think it’s too much to ask. We were told tax increases in this recent past two years were for current educational needs. This wasn’t accurate. We were told the same thing this year….we’ll see…..

        2. Neal,
          I think at least half the problem could be solved by, as you state, just telling the public why.
          I don’t agree that using the fund balance for PSERS is a good idea, but that is another conversation.

  2. Thank you Keith. Few people understand government accounting, and Act 1 effectively took the ability to manage anything but the base tax rate out of the managerial equation. I suggest people examine the revenue models. If the projected revenue is not based on a reliable formula, that can be easily identified. But expenses are zero-based for the most part…and saving on the expense side is hardly a punishable offense.

  3. From my view I hold the Superintendent responsible for mismanagement. It seems to me that as the senior manager for the District that he should have seen that there was going to be a surplus as the year progressed. Any senior manager in the corporate world would have been monitoring revenue and expenses.

    Now where is the mismanagement – in my mind I would have hoped the Superintendent would have had the children as his first priority not the Board. But in this case I see that the Superintendent holds those who grant him grandiose rewards in first place and not the school children. Yet there are many in the community that heap false praise on his contributions to the Districts successes.

    The problem I have is that I feel that it was his DUTY to the kids to point out that the District could well take care of any issues with the Health Care costs as they pertain to the very qualified Aides and support staff. Yet we heard not a peep from the Admin folks as to what other Districts do — what the estimated costs were – and just how we could have easily covered the costs and provided the same quality of support from he existing staff.

    But no — the kids will suffer and Waters and his highly paid admin staff could care less. Let’s transfer dollars to Facilities to build yet another parking lot.

  4. Every budget I have ever proposed was conservative. None made their way through the management hierarchy. Why is that? Someone was asking hard questions and proposing alternatives. Although the District Board has made progress – at least the current year projections were presented before the approval of next year’s budget – I think that residents should expect it to step up its game.

    Where were the questions about the $300,000 savings admitted to be more than a one-time benefit? About the projections for Vanguard for the current year? About the assumptions for transfer taxes and real estate assessments now that development and economic activity are visibly (at least here in the west) on the rise? About the potential for using some of the surplus to bear the risk of any near term costs while alternative solutions to aides/para disruption were explored?

    So we’re heading for another year of pre-destined surplus topping up the already brimming General Fund. I do support moving some of that into Capital (for Board-vetted projects), lest more borrowing increases interest and principal repayments beyond the $5-6 million a year for the next decade for money already spent. The PSERS ramp has a couple of more years before it plateaus, but it stays high for so many years that I don’t see that a stabilization fund would accomplish much. And do we fund those OPEB costs from operating expenses as they are paid out? What’s the likely trajectory of those costs given what seems to be a high number of retirements (?)? When should the district be releasing funds from the Fund Balance commitment instead? Important questions, worthy of detailed deliberation.

    To a couple of comments above:
    – A number of Keith’s “guesses” were already settled when the Board approved the final budget.
    – I have not heard that the district uses any form of zero-based budgeting. All the financial discussions I’ve heard are couched in terms of increments versus the current year.

    1. Ray,
      I’d much rather use debt to fund any capital projects even considering the borrowing costs rather than using prior yearly surpluses to do so. I find it inappropriate to use dollars collected from yesterday’s taxpayers to buy facilities that benefit tomorrow’s taxpayers. I’d much rather pay off a 25 year level debt issue over the 25 year lifetime of the facility. That way, the taxpayers that are enjoying the facility are the ones paying for it.
      (Actually, the borrowing costs are a non-issue. Money left with the taxpayers earns interest.)

  5. A math/finance question to ponder:
    TE has a budget of about $100M. Each year for 5 years the board raises taxes by 3% for a cumulative increase of about 15%. At the end of each of those 5 years the district shows a budget surplus equal to 3% (about $3M) and accumulates an extra unneeded $15M in their fund balance. If the TE board wanted to avoid that unneeded $15M fund balance which of the following adjustments should they have made?
    a) TE shouldn’t have raised taxes at all during that 5 year period.
    b) TE shouldn’t have raised taxes in the first year, but did need to raise taxes in each of the subsequent 4 years.
    The correct answer, I believe, is b).

    1. A stimulating question, Keith, but your options do assume that expenses are independent of revenues.

      Otherwise, we might have another option:
      c) Raise taxes only by the rate of inflation (currently 1.5%) and limit expense growth to that amount. The outcome will depend on the Year 0 position. If Year 0 has a $3 million surplus and expenses increase by the 1.5%, the $3 million surplus will roll forward every year as before. Cumulative savings to T/E taxpayers $23.9 million. If Year 0 has that 3 million surplus and expenses still increase in Year 1 by 3% and thereafter by the 1.5% inflation, then the surplus is halved, but the cumulative savings to T/E taxpayers is the same.

      T/E does have the luxury of that munificent General Fund. There should be no need keep raiding taxpayers for worst case scenarios – the district should be serious about using the commitment to cover adverse healthcare experience spikes, for example. Or to absorb the near term risk from taking the time to explore ACA options in regard to aides/paras.

      I do agree with the notion of using debt to fund capital investment that future generations will benefit from – the network upgrade or even dare I say it the maintenance and storage building. However, I am worried that when the Capital Fund runs out in 2015/16 there will be a decade of $5 million +/- principal and interest payments left for old debt. New debt repayment would have to be back-end loaded to manage the expense impact, and I think there is a limit to how much you can/should do that. So a combination of spending control, some General Fund transfers and debt seems indicated – starting with the first.

      1. Ray,
        I agree that school boards should not be budgeting for “worst case scenarios”, however, I think you can appreciate that districts can get into trouble budgeting for “most likely case scenarios”.
        Let’s suppose Year 0 shows no budget surplus. The district budgets for Year 1 with an expected 2% expense increase and implements a tax increase to bring in 2% more revenue. But in Year 1, a combination of bad events (e.g. TE loses the Vanguard appeal and the teachers win the 5 period grievance) causes an unexpected recurring expense increase of 1% and a recurring revenue decrease of 1%. The district in now in trouble for Year 2. The district needs to raise taxes in Year 2 by over 4% or cut programs. The fund balance is of no use for recurring expenses.

  6. Now we’re talkin’! If a man leaves Cleveland on a train traveling East an 82 MPH and another man leaves New York….never mind…that’s side-tracking.

    Keith, I think you are illustrating the benefits of consistent tax policy to support a good long-term financial strategy. To this, I totally agree. Under Ray’s scenario (C), he offers the basis of a longer-term strategy/policy/structure in thinking about tax policy in relation to expense growth. This concept of “tie”-ing revenue growth projections to expense growth trends over a longer time horizon is the key to a successful fiscal model (my opinion). This is what we’ve tried to introduce (from the cheap seats) at Finance Committee meetings. It hasn’t taken. You’ve read enough to know T/ESD’s recent expense growth exceeds anything that resembles “normal’ economic inflation…approximately 6% this year (actual) and 6.2% next year (projected). This level of spending increase is not possible to satiate with tax policy as limited by Act 1. This year’s preliminary operating budget deficit introduced in January was $1.3 MM..initial budget strategies adopted that month took the deficit to $1.744 MM… and there it stayed until it’s adoption as a final budget last month. No strategies were even introduced to close the gap as it was deemed “a better deficit than recent years”. This acceptance of a large projected spending increase is what leads me to question the basis of the budget projections…the original thrust of this Blog piece. It’s hard for me to believe that this level of expense inflation (and deficit) is “fine” with a representative group of well-intention people from our community. Enough conspiracy theory…we’ve heard enough.

    But back to your point…consistent tax policy and expense planning IS the key. No budget is prefect and the over/under in any given year should balance out over time…if you’re planning horizon is sufficiently long. If the strategy is to grow the Fund Balance over time for a specific purpose; then make that part of the long-term plan (I would guess this is part of your plan in UCF). If the Fund Balance is super adequate…selective use of the balance could be warranted in a given budget year.

    You did mention that the fund balance is no use for recurring expenses. This is true but our District policy was changed a couple of years ago. It currently states….Operating contingency expenses may be funded through a contribution from the General Fund Balance. The General Fund Balance should not be utilized to fund recurring expenses…. Under operating contingencies, the Board has wide latitude. In this budget, Fund Balance was used for contracted TEEA bonuses ($1.16 MM), general contribution/contingency to “balance” the budget by law ($583 T), operating contingency ($550 T), Special Education ($500 T), and revenue projection shortfall ($450). Seems like a grey area to me which of these is recurring or not..but at the point of budget adoption, they were all considered Contingent so they certainly met the letter of the policy. The change to our Fund Balance policy that I never liked was the deletion of this sentence, “The Board further understands the need to be mindful of its obligation to the public trust and the rightful demand for accountability from its constituents.” I liked those words and wish they still existed in Policy.

    Sorry to get side-tracked…good discussion. Made me think!!

  7. Could you please clarify………..

    You say in your post on the progressive network:

    A few years ago, some very right wing people started getting on the school board. They started making all sorts of decisions related to cuts JUST to “save money.” This is the Republican guise of “being fiscally responsible.”

    Karen Cruikshank (past president of the school board) is a Dem. She has publicly vehemently supported all of the cuts.

    Kevin Buraks (current president) is also a Dem. He has also steadfastly supported and defended these decisions to cut teacher hours and outsource aides and paras.

    Rich Brake is a Republican. He along with Anne Crowley (dem) are the only two school board members to vote against items because they were slipped in a consent agenda in the hopes citizens would not find out.

    Neal Colligan (who I assume is a Republican) has spent countless hours creating a plan for board members to consider so Aides and paras would not have to be outsourced only to be rudely ignored, name called (budget hawk by Pete Motel (Republican) and discounted at just about every turn.

    Other than blaming Republicans for the current state of affairs in our district, I agree with everything you wrote.

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