Politics & Government

Modeling Success

Sophisticated tools have given Hopkins Public Schools the accuracy it needs to remain financially healthy.

When John Toop arrived at Hopkins Public Schools in May 2005, the district’s finances were in shambles.

By the end of the year, Hopkins had entered “statutory operating debt”—a legal term for when districts go in the hole by more than 2 ½ percent in a single year. The district was more than twice that limit at 5.3 percent, meaning it overspent by about $4.2 million.

“We didn’t just tiptoe off the cliff,” said Toop—then the district’s controller and now its business services director.

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The following year, Moody’s downgraded the district’s credit rating to Baa1. The rating told investors everywhere that the district carried a “moderate credit risk” and that lending it money had “certain speculative characteristics.”

The district’s finances weren’t looking good.

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But just five years later, its credit rating has jumped a whopping five steps—below just nine school districts in the state. Hopkins Public Schools managed to beef up its fund balance during one of the country’s worst recessions even as it added innovative programs. Its long-term obligations are fully funded.

The protagonists in this tale aren’t your usual group of adventurers. There’s Toop, a data-driven director with an eye for fine financial details. There’s Pam Carman, who owns Carman Consulting and has an unusual affection for the spreadsheets she creates so expertly. And then there’s the model itself—a precision school finance tool that’s helped the district reach new levels of accuracy.

Together, with support from directors and other staff, they put the district's finances back on track.

Here's how they did it.

The wrong tools

Contrary to political rhetoric, managing school finances isn’t as simple as balancing a family budget because schools are at the mercy of two extremely volatile factors largely outside their control: State aid and student enrollment.

State aid will account for more than two-thirds of Hopkins’ revenue for the 2011 fiscal year. Yet Hopkins and other schools often don’t know how much state aid they’re going to get or when they’re going to get it until just before the districts approve their budgets. This year, they may not even know until after approving their budgets because of the contentious debate at the Capitol over how to close the state’s deficit.

Meanwhile, the bulk of this state aid relies on student enrollment numbers—so-called per pupil funding. Schools must be able to predict how many students in order to know how much they’ll receive. Forecasting these and other variables requires sophisticated models.

Unfortunately, Hopkins didn’t have those back in 2005.

Its enrollment numbers, for example, were based on utility bills and a model that former state demographer Hazel Reinhardt created. Reinhardt’s model was fine, but the district had neglected to input much of the required information. Staff could see the predictions were clearly off, but it was impossible to come up with a better answer.

Toop joined Hopkins at the tail end of the budget process—too late to keep the district out of statutory operating debt. But when he became interim business services director in December 2005, he brought in a big-picture financial planning model that he’d used at his previous job. It only had the ability to play with three variables, but that was enough to put a tourniquet on the bleeding.

“It got the job done for the times that we needed it,” Toop said.

A new structure

Meanwhile, changes were afoot behind the scenes. The school board named John Schulz as interim schools superintendent in 2006, and he immediately started reworking the budgeting process.

The Citizens Financial Advisory Committee was a key focus of his attention. At that time, about 25 people served on the committee. Carman said it also had a reputation for rubber-stamping whatever the administration wanted to do.

Schulz, who thought the committee was too large to dig into the details, rechristened the committee as the “Superintendent’s Advisory Committee” and sliced it down to nine people: three citizen representatives, four administrators and two board members. The changes didn’t make everyone happy.

(The committee has since been enlarged to six citizen members and resumed use of its original name.)

Carman was one of the three citizen members on the revamped committee. She and other members dug deep into the details, the administration providing them with any public data they wanted.

Yet it quickly became clear that much of this data was a mess. Data wasn’t comparable from year to year. The district used a variety of systems that couldn’t always communicate. There was no technology director to keep everything in line. Committee members could take a stab at looking forward, but examining past trends was exceedingly difficult.

(Carman is no longer on CFAC because she works for the district as a consultant.)

Setting an example

Carman brought a unique skill set to the committee. She double majored in accounting and finance, with most of her time spent on the finance side. But defying the bean-counter stereotype, she’s just as engaging as she is a whiz at building funding models. She demonstrates her Excel spreadsheets with a verve that the less-math-inclined reserve for new cars or baby photos.

Labor negotiations were on the way, so Carman set to work distilling the district’s data into a “teacher costing model” that allowed staff and union members to see the effects of various proposals. She was an unpaid volunteer at the time.

Toop said the model has the advantage of “immediate education.” Instead of having to wait days or weeks to crunch a proposal’s numbers, the parties can see right away how many jobs the district would need to cut to pay for it.

Such effects have the power to change the conversation, he said. In the most recent teachers contract, the model reported that the initial union proposal would cost just under 21 teaching jobs. The sides eventually agreed on a settlement that reduced staff by 5 ½ jobs.

“We show them this right at the table,” Toop said. “They can play with this if they want.”

Building a funding model

With that success, the district enlisted Carman’s help in a “secondary education study” that would eventually lead to the starting this fall. The study seemed straightforward enough—review the junior high and high school programs and reconsider scheduling options.

But those considerations have financial implications, that the district didn’t have the ability to measure. So Carman started building in the ability to forecast out the three to five years out that the district wanted. The junior highs and high school don’t operate in isolation, though, so she had to look at the elementary schools. And then there were the referenda for school levies and all manner of other details.

“It’s just kind of grown from there,” she said.

Toop, meanwhile, had been cleaning up Hopkins’ books since mid 2006. He’d changed all the district’s custom accounting codes to the state mandated codes in order make managing easier. The district was getting the consistency and connectivity it hadn’t had until that point.

Carman teases him today about wanting to hold onto the rudimentary funding model he brought to the district. But Toop could see the potential in Carman’s system as soon as he looked at the secondary model she was building.

The two are, in fact, quite close. Since this year’s budget discussions began in January, rarely has a meeting gone by that they weren’t seated side-by-side at the boardroom table, keeping directors up to date.

By February 2009, they had a tool that, along with a new enrollment-projection system, at last gave Hopkins the accuracy it needed. The secondary model was now just one piece of a districtwide financial planning tool. Instead of the three variables under Toop’s model, the new one allows planners to play with 28 variables—and many, many more variables within variables.

This Excel workbook has become as vital of a part of budget discussions as any expert testimony. Board members ask questions, Carman punches in a few numbers and everyone can see the impact of the proposed change right away.

“You get to see the whole picture,” Carman said. “When you start to get that perspective, it gives more meaning to the (discussion).”  

The district’s finances have turned around with these new changes. Instead of being 5.3 percent in the hole, Hopkins is averaging positive 2.2 percent over the past three years and positive 1.8 percent over five years. After a successful trip to Moody’s , an Ehlers financial planner praised the district’s “state of the art” modeling tools.

Carman is no longer volunteering her time. Her work on the forecasting model is part of an $80,000 contract that also includes work on other models.

For Toop, the money is well spent. The models have a level of accuracy that gives school board directors the assurance they need to put more money into programs that directly help students.

“She’s much more than just a model builder, that’s for sure,” he said. “I can’t put a price on that.”


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