Inside Public Education: School Finance

So far we’ve met two categories of bad school board members (See “” and “”).  Another problematic category of board members requires some background to understand fully.  Funding schools has become a huge issue in recent years, especially as it applies to teacher retirement.  We’ll save that topic for another time, but there’s no doubt that school finance is an esoteric, highly specialized issue.  That might be why the Financial Reactionary School Board Member (FR) has had such a profoundly negative impact on public education.  Until voters recognize some of the games people are playing with school finance, the influence of Financial Reactionaries will continue to be far-reaching and damaging.  So let’s address that knowledge base right now.

I know; I know:  You don’t like numbers and this kind of stuff confuses the snot out of you.  How can anyone expect you to understand anything that includes terms like “assessed valuations” and “unamortized bond issuance premium” and (NO-O!) “deficits.”  The more I hang around schools and school boards, the more I come to the conclusion that this shroud of mystery and complexity might have been intentionally erected by those in charge to keep everybody else at a disadvantage. 

You’ve never seen any thicker fog produced than when the business manager (the guy who collects the money, makes the budgets, and pays the bills) explains something to the board.  Does this make business managers more secure and indispensable to boards, or is the jargon that they espouse simply efficient shorthand that all specialists employ?  Maybe all the confusion is our problem, not theirs.  All I know is that most people are woefully ignorant when it comes to the billions of dollars that schools consume each year, which gives business managers and FRs way too much power.

So what are the basics of school finance?  (Don’t be afraid—I can see you cringing in terror.  It’ll be okay, I promise.  *Hee-hee-hee*…whoops, please ignore that evil chortle.) Essentially, it comes down to the school district’s spending about the same amount that it takes in.  Whoa, let’s slow down here!  No, I’m serious—that’s really all there is to it.  How much money a district should take in and on what it spends what it collects can be examined and debated forever, but as long as the balance sheet comes out about even at the end of the year (fiscal, of course), that school district’s finances will be in good shape.  If you should ever wander into a board meeting where the next year’s budget is being discussed, that’s the key question to which you need a straight answer—will we spend about as much as we collect next year?  Yes?  OK, then regardless of the stupidity of some of those expenditures or the foolishly low/high level of revenues, the finances of the school district are OK.  Now, let’s talk about that clown my kid has for English this year…

But wait, before we get to that self-righteous, pedantic clown, there is a potential fly in our financial health ointment.  The business manager has projected that our spending (expenditures) will outstrip our supply of cash (revenues) next year; and that within four years, our savings (reserves) will be used up, leaving us with absolutely no money to run the schools at all!  Omigod!  What are we gonna do?  Within a couple of years, we’re going to have to borrow money just to pay our monthly bills.  We’d better take some stern actions right now before we go over that financial precipice and splatter ourselves on those sharp-edged balance sheets below.  Yo, teachers!  You remember that raise you guys thought you deserved?  Well, sorry, but lookee here…

Our first lesson has to do with the difference between projected and actual numbers when it comes to how a district’s financial health. 

Every year in Illinois, school boards are required file an audit with the state to gauge how the district is doing financially.  (See http://www.hinsdale86.org/departments/BusinessOffice/Documents/Audit%20Reports/Hinsdale%20THSD%2086%20-%20FY2011%20CAFR.pdf for the 2011 audit for Hinsdale Township High School District #86, for example.)  These audited financial reports contain actual numbers of how much money was spent the last year by the district, how much revenue it took in, and what its overall situation is, going into the next year.  A “year” in CPA-ese means “fiscal” year, July 1, 2010, through June 30, 2011, in the case of Fiscal 2011.  Illinois requires that all school districts submit the same reports calculated the same way, so the annual financial reports are the most comparable, real numbers on a school district’s financial condition.

School boards, however, want more information about the future, so they order their business managers to prepare projections.  Sure, the state also requires that school boards prepare a budget for the next year that needs to be finalized by October, but October is several months AFTER the current fiscal year has already started in July, which is unacceptable for most school boards.  So the business manager has to make projections on what the future will hold, going two, three, five years out so the board can make plans for what it needs to do.  Schools are complex societies with scores of competing needs, and as we all know, there are just so many slices of the financial pie that can be made.  No one disputes the importance of making guesses about the future in order to anticipate needs and avoid problems.  Projections have a limited role to play in how the board approaches its job.

Notice that word “limited” there—here’s where the arguments get started.  First of all, the business manager is an employee of the school board and works its behest.  He’s the one who will be held responsible (unfairly, in my opinion) if the budget he prepares for the fiscal year turns out to be off in a negative way when the actual numbers come in.  Let’s suppose that the business manager presents the board with a budget showing revenues exceeding expenditures by 1.5% for the coming year.  In a school district with roughly $70 million in expenses, that 1.5% would translate to a surplus of about a million bucks.  Now, let’s imagine the year doesn’t go exactly the way everybody thought it would; and when the annual financial report comes in, the audit shows that expenditures actually exceeded revenues by 2%, and the district has to hit up its reserves to the tune of $1.4 million.  Given the vagaries and intricacies of all the variables that go into a school district, you would think that a plus/minus flex of 2-5% in any budget wouldn’t be that big a deal—oh, how wrong you would be!  There’d be hell to pay in the scenario just outlined, absent some obvious and rare expensive occurrence—some natural or legal disaster, for example. 

If it were just a normal year, the board would be outraged at the deficit spending and would start looking for someone to blame.  What target could be more convenient and logical than its business manager?  It wouldn’t necessarily mean his job—although it might—but at the very least, this kind of deficit would lead to significant public humiliation as the board members took turns feigning ignorance on how this came about and taking cheap shots at the business manager for his failure to do something about this debacle and his not alerting the board about this impending calamity before the financial report came out. 

Again, this would not be reasonable or fair, since the board has a list of expenses presented each month at its meetings, and most have at least quarterly reports from the business manager on how the budget looks compared to what’s really going on.  Deficits in school districts should never be shocking surprises—they develop over 12 months, so any board members who act as if the annual financial report results come out of nowhere have been negligent and irresponsible in their duties for at least a year and should be kicked out of office immediately.  Since this never happens, the business manager becomes the scapegoat for this kind of financial disaster. 

And business managers know this.  Assuming a competent business manager, he can go three ways with his projections:  Pessimistic, real, or optimistic.  Pessimistic budgets make the situation seem much worse than it probably will be.  Revenue approximations become painfully conservative, underestimating how much money will come in based on recent history.  Expenditures get the worst-case-scenario treatment, with cushions of budgeted cash surrounding all anticipated expenses.  When the pessimistic projection is made, inevitably the district will have a potential deficit based on the nastiest possible outcomes.  This imagined financial Armageddon, however, actually sets the stage for a happy ending:  If instead of an anticipated surplus of $1 million followed by a $1.4 million deficit, the budget predicts a projected deficit of $1.4 million that morphs into an actual surplus of $1 million; suddenly the business manager is a hero, the person who saved the district from financial ruin with a mighty keystroke on his computer, an insightful poke at his calculator and a raised eyebrow over his spreadsheet. 

Do I need to go over the other two projection options?  Of course not, the pessimistic projection is the only way to go.  Sure, the board isn’t happy with the projected numbers the business manager is giving them, but he can simply point out that nothing bad has actually happened yet, that he’s just the messenger, trying valiantly to warn the board before disaster strikes.  Then the board can scurry about, tweaking expenditures here and there, without really doing much, and share in the credit when the actual numbers come in during July.  Business managers have a vested interest in making gloom and doom projections that mutate into sunny realities.  Since boards can change membership significantly every two years, this “The Sky Is Falling” approach to financial projections never seems to grow old.  As long as the numbers come in better than they were projected to be; the board can smile smugly; affectionately tussle the business manager’s hair and pat itself on the back.

The business manager’s self-preservation approach has become standard procedure for many school boards.  It seems that these school districts have a perpetual state of financial crisis, but that crisis is always off in the distance.  When the actual numbers are analyzed by way of audits and annual financial reports, it becomes clear that things are pretty good. 

In Hinsdale Township High School District #86, for example, at a Feb. 2 Finance Committee meeting, it was reported that the end of year fund balances (how much money was left after all revenues had been collected and all expenses paid for the entire year) has been averaging roughly 30% of the next year’s budgeted costs for the last several years.  In other words, before a single dime of revenue for the next year has been collected, the board is sitting on a savings account balance of 30% of the costs for that next year.  (See pages 4 and 5 of this document for #86’s numbers http://www.hinsdale86.org/sb/Agenda%20files/02%2006%2012%20Committee%20of%20the%20Whole/vi-b2%2002%2006%2012.pdf.)  And this 30% (which is $27 million of the most recent $90 million budget for the two high schools) is some 9% (or more than $8 million) more than the board’s own targeted reserve goal of 21%.  And that 21% was itself an arbitrarily high number that few school districts are able to amass.

Yet, you can be sure that should District 86’s reserves shrink a single percentage point, Financial Reactionaries will scream in horror and propose all kinds of draconian cost-cutting steps.  Next time, we’ll take a look at how these individuals have taken over many school boards and, coupled with the always gloomy financial projections, corrupted the way we look at funding our schools.