When Does a $48 Million Deficit Mean a “Balanced Budget”?
In the press release announcing MDUSD’s 2017-18 Adopted Budget, Superintendent Meyer says that the district “is pleased to once again have a balanced budget”. But on page 148 of that budget, the district’s own figures show an unprecedented deficit of $48.4 million for the coming school year. Well, as we heard the district’s Director of Fiscal Services say at a public meeting on May 3, the gap between revenues and expenses “is not a deficit if it can be funded with reserves”. Apparently, the district is doubling down on that definition of “deficit”, even as continuing operating shortfalls eat away at the district’s reserves.
What happens when the district can’t fund huge deficits anymore? MDUSD’s own projections show that it plans to cut the budget by approximately $40 million in the following 2018-19 school year. So in just 12 months, after years of deficit spending, the district will suddenly exercise the financial discipline needed to almost break even. But to do that, the district would need excellent expense controls, and recent projections put that capability into doubt. In its March report, MDUSD projected that the deficit for the coming year would be only $29.9 million. In other words, the 2017-18 deficit increased 62%, from$29.9 million to $48 million, just during the three months before the school year begins on July 1!
Remember that compensation costs take up 85% or more of district budgets here in California. The state doesn’t fund schools generously enough to pay for much else. So cutting budgets once the reserves are tapped out means cutting positions. We estimate that the budget decline from $378 million to $338 million that MDUSD projects for the 2018-19 school year could involve the elimination of as many as 470 positions (assuming average total compensation costs of approximately $85,000 per fulltime employee, based on MDUSD compensation data shown on Transparent California).
MDUSD makes vague commitments that much of the necessary reduction in expenses will come from lower expenditures for books, supplies and operating services; however, books and supplies are only about 6% of the 2017-18 budget. MDUSD could eliminate all of the $23 million projected to be spent on books and supplies and still not solve next year’s serious budget challenges.
Here are some of the major concerns in this new budget (see summary on p 148):
1.) As noted above, the projected $48.4 million deficit represents a 62% increase from the $29.9 deficit that MDUSD projected for the coming year in their March interim financial report. That rapid increase suggests that the district is not staying abreast of rising expenses.
2.) Expenses are projected to increase $14.3 million even for the current 2016-17 school year that is almost over – from the $355.3 million estimated in March to a current estimate of $369.5 million. How did the expense estimates for the current year increase so much over a matter of weeks?
3.) Expenses are projected to increase another $8.4 million in the upcoming 2017-18 school year starting July 1, from $369.5 million to $378 million. Why allow expenses to grow so much, when the deficit is larger than ever and major cuts are also being projected for the following year?
4.) After repeatedly denying that there was anything wrong with allowing reserves to fall to the dangerous levels shown in past projections, MDUSD is now showing reserves stabilizing at a more reasonable level of $22-23 million. The district’s own projections show that they can only maintain those reserves by making drastic cuts next year.
A History of Poor Expense Management and Changing Projections
Residents could be forgiven for thinking that perhaps none of these figures are reliable, if they’ve followed MDUSD’s recent history of financial management and reporting.
Last June, we were told that the total of MDUSD’s annual projected deficits for 2016-2019 would be almost $45 million over three years. Annual deficits of $10 million to $22 million were projected to continue indefinitely, but reserves would remain healthy (over $45 million), at least through 2019.
Then in December, after the impacts of the district’s new labor contracts were factored in, MDUSD said the total deficits over the three years had grown 84%, to over $82 million. This projection showed higher expenses due to the salary increases and deficits of $25-30 million each year through 2019. Reserves (needed to fund the deficits) were projected to fall from $68.5 to just $15.8 million over that period
In March MDUSD issued their next budget revision, showing that projected deficits for 2016-19 had grown again, to $86.5 million. Again, projections showed annual, recurring operating deficits continuing indefinitely, but now with reserves falling to just $11.6 million, or 3.3% of the budget — about 12 days of operating expense cushion. In that budget revision, expenses were projected to be almost flat, at $354-355 million, for the three-year period of 2016-17 through 2018-19.
Adopted Budget, 2017-18 (June 12, 2017)
Although the MDUSD press release says “the 2017-18 Adopted Budget contains proposed budgeted reductions of $9 million in 2017-18; $11 million in 2018-19; and $5 million in 2019-20”, we could not find any figures to support that claim. Below are the actual total expense figures from the budget:
|Change in Expenses from prior year||
|Reserve as a %
In the June 12 board meeting presentation of the 2017-18 Proposed Budget, there were no questions from board members on how the rapidly escalating deficits will suddenly be eliminated in the following years by cutting expenses from $378 million to $338 million and then holding expenses basically flat thereafter. But even though MDUSD isn’t telling us what their plan is, it’s not that difficult to guess what they will do.
Even a “Flat” Budget Requires Cutting Employee Positions
We’ve discussed above how the projected $40 million in budget cuts will necessarily involve people cuts. But a flat budget also requires continual headcount reductions. Even without any raises like those in the last round of MDUSD contracts, compensation costs tend to rise 1 ½% per year, due to the district’s step-and-column salary structure (where educators get increases due to longevity and increases in their credentials). Also, as described at the CalSTERS link below, between this year and 2020-21, MDUSD contributions for employee pensions must steadily rise, from 12.58% of employee earnings now to 19.1% in four years. Those rising contributions increase total compensation another 1.6% each year.
With normal step-and-column increases, increasing pension contributions, and steady enrollment, total MDUSD expenses should increase 2.5%-3% per year, even if there are NO increases in other areas. Therefore, even after the district makes the big cuts in 2018-19, maintaining a basically a flat budget will require continuing personnel cuts. Keeping expenses flat under a $338 million budget means avoiding compensation increases of $8-9 million (i.e. cutting another 90-100 positions) per year. Unfortunately, there have been no candid discussions by MDUSD of what these cuts might mean, where they would occur, or the likely impacts on student instruction.
We understand that California’s unpredictable financing of public schools can make revenue projections difficult. But that is all the more reason to have good expense management, reliable financial projections, and honest communication with the public. So far, we are not seeing that in MDUSD. The latest budget, with projections that are so different from those in prior reports, suggests that the district is using cosmetic gamesmanship to avoid having difficult discussions with residents and district employees – at least for one more year.