Fiscal Responsibility/Sustainability

[This is an email published with permission from Dave Lunt.]

Dear Superintendent Hintz and Board Members:

There have been some recent conversations regarding fiscal responsibility or sustainability. Since finance is my bailiwick (and I obviously have lots of opinions to which I believe you are entitled), I thought I'd weigh in on this one as well.

A balanced budget requires that income match expenditures over a specific time frame (typically one year). If you spend more than you take in, you have a budget deficit. If you spend less than you take in, you have a budget surplus.

Deficits must be financed, either through debt or through tapping reserve or "rainy day" funds. Surpluses are typically used to fund reserves or to pay down debt from prior deficits.

The district has not operated with a balanced budget for some time. Expenditures exceeded revenues, and the deficits were funded by reserves. In the process, reserves have been drawn down to the minimum level the board deems prudent.

Let's walk through the practical implications of operating deficits. I'll assume that a school district's revenues are growing at 1%, while expenses are growing at 5%. If the district has reserves, it may be able to fund the resulting deficit for a period of time. If not, the district must either issue debt or cut expenses to close the gap.

Issuing debt merely delays the inevitable unless there is some future prospect for revenues to exceed expenditures. I don't think that debt is a viable way to fund operating deficits, so let's eliminate that option. Therefore, the district must cut costs to eliminate the 4% spread.

Let's say that there are 35 students in the average class. If a district is running a 4% deficit and assuming that the cost structure remains stable, then teachers will bear their proportionate share of the deficit and need to be cut 4% annually (or more meaningfully if a deficit has increased over time and has been funded with reserves until that is no longer an option). Other things equal, the average class size will have increased to nearly 43 (up 22%) after five years. At that point, if not sooner, the district would need to close schools. In our case, it would probably result in the closure of a junior high, a high school, and at least a couple of elementary schools.

It's actually not that simple. First, generally younger and lower salary "probationary teachers" are the first to go. As a result, more teachers will need to be cut to achieve the same dollar reduction in costs, so the impact on class size would be incrementally worse. Second, the district drains the pipeline of future teachers and increases its weighted-average cost per teacher (as well as experience level, so it's not all negative). While there is something to be said for experience, I believe that you will agree that it is most healthy to have a cross-section of experience levels.

The scenario I just described is not sustainable and not far off the mark from ours. While I understand the need to negotiate in good faith, the reality of the situation is that the district can't afford to spend more than it takes in. The result will be steadily increasing class sizes and school closures.

I believe teachers are underpaid. As I have mentioned to you, I come from a long line of educators. My dad was a college professor at a public university for almost forty years. He was a Ph.D. and far smarter than I'll ever be. I probably matched his income five years out of college, purely because I chose a different line of work.

But salaries are a function of supply and demand and determined by the marketplace. While our district needs to be competitive with others in the area, we can't meaningfully impact the marketplace or pay more than we can afford.

I also appreciate the concern about a strike. I was told that it takes ten years to recover from a strike. How long does it take to recover from what we just went through?

I would like to tie this back to my last couple of emails. This scenario is yet another potential negative feedback loop that could cause additional students to opt out of the district, putting additional pressure on revenues and exacerbating the situation. If this plays out, the district will continue to be an exporter of talent (both students and teachers) and lessor of education-related properties.

Dave