SCHOOL FINANCES: PROACTIVE SOLUTIONS TO CHALLENGING ISSUES

The Santa Barbara School District is a service business – it serves the educational needs of our community. As with any business, there are two components of the income statement. These are revenues, which fluctuate relative to average daily attendance (customers or students), and the expenses, which are approximately 85% personnel costs. In times of declining revenue, a business must operate leaner and more efficiently while concurrently analyzing the possibility of additional revenue sources. The school district is required to live within a balanced budget. Just because the balanced budget doesn’t leave extra money doesn’t mean there’s a budget crisis.

In “School Finances: From Bad to Worse,” a column that ran in the September 28 issue of the Journal, two-term school board member, Dr. Bob Noël, wrote that “forthcoming and foreseeable additional costs could drive the Santa Barbara Elementary District under.” It is clearly time to steer in a new direction.

The district’s finances are already audited every year. So Dr. Noël’s call for an additional “fiscal solvency audit” to be performed by outside consultants would only appear to be increasing expenses to learn that we need to reduce expenses.

The district has hired a new assistant superintendent of business services who will start November 1. Prior to adding costs to the budget by outsourcing research, it would seem prudent to give this employee a chance to perform. A committee formed by district personnel, community members and board members – who have interest and expertise in budgetary management – could be formed to lead the district in not only proactively addressing the state of declining revenue, but in changing the presentation of the figures to make them more readily decipherable for those without a background in finance or accounting.

Each line item cost needs to be analyzed to search for reductions. For example, for the 2005-06 school year the salary expense for substitute teachers was $612,380. Partnering with teachers to reduce the number of substitutes required (where possible) and sharing the savings with teachers in the form of a stipend might produce savings for the district while simultaneously increasing teacher compensation. Creative ideas should be pursued and analyzed.

Growth in bureaucracy, while a handy sound bite, is not always the problem. According to Superintendent Brian Sarvis, the number of administrators has actually decreased this year from last. Compared to similarly sized school districts, the Santa Barbara School District’s administration operates on a leaner budget.

As enrollment is projected to continue declining, we know that our revenues will decline commensurately. The 2005-06 elementary district revenues were $43.47 million while current estimates for this year indicate an income of $43.12 million, a decline of .81%.

Staffing levels have been addressed for this year, which will help keep expenses in line with revenues, but budgets are fluid documents. Because personnel expenses are such a large percentage of the budget, the impact of retiring teachers each year is a significant factor in overall costs. As teachers retire from the district at the top end of the pay scale, they are frequently replaced by new teachers who come in at the bottom of the pay matrix. This can mean a difference of savings of up to $30,000 per retiree. These reductions are obviously offset by annual percentage salary increases. These numbers can be managed aggressively.

GASB 45, an accounting standard, requires that we now identify the unfunded liability of retiree health benefits on the balance sheet. Retiree benefits have been an ongoing expenditure out of the district’s general fund. This amount is approximately $500 per year per retiree who elects to be on the benefit plan. In 2005-06 the annual expenditure from the elementary budget was $217,354. Thus the net impact on the elementary budget to proactively adopt these standards would be an increase of $60,000, not an additional $277,000 in the next year’s budget, as was stated erroneously in Noël’s article. There are several reasons the district should review its financial obligations. According to AON, the company that prepared the actuarial evaluation study, these include:

• Pre-funding alternatives – although funding is not required, an unfunded plan results in higher balance sheet liabilities and costs

• Bargaining issues – recognizing how the obligation will impact the collective bargaining process in the near- and long-term

• Bond rating – potential impact to the cost of debt

Most important to note – this liability is not a surprise.

It is time to stop reacting to issues that “surprise us” and start aggressively managing line item expenses. In his column, Dr. Noël wrote that “ad management over a period of several years ran the cafeteria operation deeply into the red.” Where was the fiscal oversight to prevent this outcome?

A fiscal reserve at the elementary district of 3% is required by law. Additional reserves provide additional “cushion” while dealing with the challenges of declining enrollment. When proactively building additional revenue streams and managing expenses, an additional cushion of more than $800,000 (moving reserves from 3% to 5%) becomes a goal to work toward, rather than an essential current line item expense.

While sensationalizing issues attracts attention, in the end, knowledge, research and hard work can actually produce positive solutions.