Financial Report Warns of Shrinking School District Savings

The school district’s financial advisory board remains pessimistic that the district will see more money come in—something that, coupled with increasing employee salaries, could push the fund balance below recommended levels as early as the 2013-14 school year.

The analysis comes from the Citizens Financial Advisory Committee, a five member-group that helps with financial planning. School Board directors discussed the report for the first time Tuesday as part of a larger discussion about 2012-13 budget process.

“CFAC kind of tells it how it is,” said Director Wendy Donovan, the board’s treasurer. “It just kind of sets the whole tone where we have to watch our bottom line no matter what we do.”

(Click on the PDF to the right to read the full report.)

Shrinking savings

Schools are often criticized for having overly large fund balances, or savings. And on the face of it, Hopkins appears to be sitting pretty. Its fund balance is $11.7 million or 14.5 percent of general fund expenses. That’s more than the 10 percent recommended—and well over the 6 percent required under district policy. 

But after a likely peak next year, it’s on track to continue dropping into 2015-16. The reason comes down to simple math: If revenue stays flat and costs increase, declines are inevitable. Under a worst-case scenario, it could even hit “statutory operating debt”—a legal term for when districts go in the hole by more than 2.5 percent in a single year.

Hopkins Public Schools last entered statutory operating debt in 2005—overspending by 5.3 percent, or about $4.2 million. It has been a difficult, albeit relatively rapid, slog out of that hole.

Employee wages will sharply influence the trajectory of the declines because salary and benefits account for 80 to 85 percent of the district’s expenses.

Assuming the district doesn’t get any extra revenue, Hopkins’ fund balance would sit at 18.4 percent in 2013-14 without a salary increase. With a 2 percent salary increase, the savings would be 10.5 percent that same year—just a half a point above the recommended level.

The Hopkins Education Association did not return calls requesting comment.

Wages last came under scrutiny when School Board directors 5.7 percent larger than the last one. Health care costs—which grew 8 percent in the first year and 5 percent in the second—accounted for the bulk of that growth, although there were wage increases of 1 to 1.5 percent.

Some directors insisted Hopkins earmark some of the district’s fund balance for the extra costs in order to underscore worries about where spending is headed.

The financial modeling used in the CFAC report was completed before that discussion, so the fund balances do not take that possibility into account.

Leveling off

Of course, the district’s financial future isn’t carved in stone. CFAC encourages the board to continue with a “sustainability principle” in which manpower decreases offset any employee compensation above a certain baseline.

The most recent contract exceeded the baseline by 1.7 percent or about $800,000. It still remains to be seen whether manpower will actually drop by that amount or whether the directors will make up for that difference with the fund balance—or do some mix of the two.

School Board directors should take up that issue soon.

‘The Phantom Gap’

In addition to rising compensation, the district faces the challenge of falling enrollment. It had 103 fewer students this year than it did last year and 210 fewer than it did in 2008-09. Enrollment is key for districts because so-called “per-pupil payments” based on the number of students determine a large part of their budgets.

But with enrollment, eliminating teacher positions can do only so much to close budget holes—a fact called “the phantom gap.” The CFAC report spelled out why this is the case:

• State per-pupil funding generates about $6,000 a student.
• If enrollment drops by 100 students, the district would lose about $600,000.
• It could cut six teachers to make up some of that loss—a drop of about one teacher for every 17 students lost.
• But with salaries and benefits of $60,000, those cuts would make up only $360,000 of the lost revenue—leaving a “gap” of $240,000.

Under such a scenario, that difference must be made up by cutting in other areas.

Closing the gap

The report does not focus solely on cuts, though. It also allows for devoting savings in excess of the recommended 10 percent toward one-time items or programs that increase enrollment—a subject that was an increasing topic of School Board discussion as 2011 drew to a close.

CFAC members will formally present the report to the board Jan. 19.