Contrasting Financial Predictions for Hopkins Schools Sow Confusion

(Editor’s Note: This article is part of three-part package. to learn why Hopkins got into financial trouble several years ago. to read about the challenges that make education finance hard to understand.)

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When School Board directors examined the district’s financial future in January, an advisory committee presented them with grim graphs whose lines sloped ominously downward. The forecast showed the district’s savings sliding below a financial advisory committee’s recommendation, beneath the level required by district policy and on into negative territory.

The report echoed another presented a year earlier, and it backed up that Hopkins faces a “self-imposed structural deficit” if salaries and benefits continue to climb—which they did with the teachers contract .

But when Superintendent John Schultz presented his proposals for the 2012-13 budget, he didn’t bring a package of cuts to the School Board. Instead, he brought that both shored up existing programs and launched new efforts—such as and .

The mixed signals are something that have perplexed even some School Board directors—not least because the district is still haunted by the memory of time it spent eight years ago in “statutory operating debt,” a legal term for when districts go in the hole by more than 2.5 percent in a single year.

“I don’t want to have to go back where we were. We worked really hard to get here,” said Board Treasurer Wendy Donovan, one of two people to vote against pieces of Schultz’s proposal. “I don’t want to have to spend and then cut. I want to be looking out three years.”

Yet that’s a worry Business Services Director John Toop categorically rejects: “I can’t tell you that five years from now we won’t have made any reductions because that would be silly for me to say that. However, I can guarantee you in five years we’re not going to be in (statutory operating debt). I can guarantee that.”

Following the board’s preliminary budget approval in March, Toop’s perspective seems to be winning. Yet the contrasting visions are no less important than they ever were.

Plotting the future

To understand the differences, it’s first important to distinguish between the district’s budget and the funding model that produced the dire forecasts above.

The budget is what it sounds like: an itemized look at what money the district expects to take in and how it expects to spend that money.

The Hopkins funding model, on the other hand, forecasts how decisions and events will impact the district’s financial situation into the future. The district brags—with good reason—that this massive collection of Excel spreadsheets is one of the best financial planning tools in the state. Administrators can tweak dozens of variables to see what effects the changes would have.

Yet the model is only as good as the assumptions it’s built on. 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.

At one point, district planners did five-year projections, but that timeline looked out past two legislative cycles that could drastically alter the district’s financial situation.

They now do three-year projections. Although that still leaves one legislative cycle unresolved, it keeps the timeline far enough out for strategic planning.

But ultimately, district leaders must make their best guesses at what will happen and plug those guesses into the model. The School Board has final say over what assumptions the district uses, and Schultz uses these to draw up the budget he presents to the board in the spring.

“The model becomes extremely fluid,” Schultz said. “The model can look at it in a very liberal way. It can look at it in a very conservative way. … The thing to reiterate is it is a planning tool, and there still have decisions to be made behind it.”

Other influences

But before the board digs into the model, they first receive recommended assumptions from the Citizens Financial Advisory Committee, a five-member group that helps the district with financial planning.

“CFAC kind of tells it how it is,” Donovan explained at a board meeting. “It just kind of sets the whole tone where we have to watch our bottom line no matter what we do.”

CFAC also tends to be more cautious in its assumptions, Schultz said.

The level of caution can cause the picture to change wildly. The most optimistic funding model projection would have a fund balance of 12 percent in the 2015-16 school year—comfortably above even the 10 percent that CFAC recommends.

By contrast, the most pessimistic projection has the fund balance at negative 26 percent the same year. That’s a 38-point spread in four years just by tweaking state revenue and salaries.

The district can refine this model when it gets better information—as it did when it took into account the new teachers contract and more accurate information about how it spent its money.

But even with those adjustments it’s still looking at a nearly 10-point spread that would mean the difference between a healthy fund balance and going into the hole.

(See the graph to the right of this article for a comparison of forecasts.)

Appropriately cautious

With so much uncertainty, the one thing that is certain is that the funding model will be off. The key is that it’s off in the right direction—leaving the district with more money than expected, Toop said.

“Would you rather have good news or bad news?” he asked.

That’s why Schultz argues the best way to tell whether a school district is on track financially is to simply look at whether its fund balance is growing.

“If our fund balance was going down, and we weren’t doing anything about it, I would tell the voters, ‘You might want to talk to your superintendent and tell him to knock that off,’” he said.

By that measure, Hopkins has done well in recent years—with surpluses each of the past six years. For the 2008-09 school year, Hopkins’ budget was about $7.7 million better than expected.

“If we budget and have a balanced budget or show a surplus for each year we’re budgeting for, how can we possibly go into (statutory operating debt)? We couldn’t,” Toop said. “So I just have an issue with that.”

Now that the new model has some historical data behind it, planners have the confidence to be a little less cautious—part of the reason Schultz could find money for his $1.3 million proposal.

That’s important because not everyone is won over by excessive caution. Money saved is money not being used to educate students. During contract negotiations, Toop said, some teachers also thought the district was being overly pessimistic, which could give it additional bargaining power. And pessimistic predictions, whatever the assumptions behind them, can make directors more reluctant to start new programs.

(The Hopkins Education Association declined to comment for this article.)

Yet with this being the first year the school district departed from the CFAC assumptions—and then only to reflect the contract settlement—caution historically rules the day.

Administrators promise to tell CFAC about the perceptions that have arisen from the group’s cautious assumptions, although it will ultimately be up to CFAC to decide whether to take those perceptions into account.

Still, when School Board directors point to forecasts that show the district returning to statutory operating debt, Schultz counters that there’s no certainty the bleakest assumptions will come to pass and that, if they did, the district could take steps beforehand to head off financial catastrophe.

Said Toop: “To look at these numbers … and have people think, ‘Oh five years out, you’ll be in (statutory operating debt),’ is kind of problematic to me, too, because I do have a little experience in school finance. I think I can read the Legislature pretty well. And some of the parameters that the board members have been trying to place forth on revenue may not have been the best parameters to put in place as far as what’s probably going to happen.”

In the end, school districts face two competing priorities with their financial planning. Socking away money increases financial security but leaves less money for the district’s sole reason for being: educating students. Yet putting more money into classrooms gives districts a smaller cushion when times get tough.

Only time will tell how well a district did at striking a balance between the two.

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