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Thursday, January 29, 2009

District's Budget Workshop Shows Huge Deficits for Next Two Years

The Davis School Board met last night for a budget workshop. Given the fiscal situation and uncertainties in some ways the district stands in a much more challenging landscape than they did last year at this time. The chief reason for that is that while they are working off the governor's budget assumptions, we do not really know what the budget is going to look like if and when it is passed by the legislature.

As a result, the key objectives for the district are to look for ways to build capacity. There is an additional challenge of finding where the district can build in cuts outside of the categorical funds.

The district's priority is to find ways to reduce spending and get by through 2010-11 without taking money from educational programs. That is a tricky endeavor.

If there is good news, it is that despite the uncertainty, despite how bad the economic times are, right now it looks like the district if given flexibility by the governor and the legislature, a big if at the time this is written, the district can escape through 2010-11 without massive layoffs.

In part that is due to the district putting itself in viable fiscal position the last few years, in part that is due to a stabilized enrollment, and in part that is due to the generosity of the people of this district who came through with one-time money through the Davis School Foundation last year and through the passage of Measure Q in 2007 and Measure W in 2008.

Again, because there is no state budget, the district due to laws and regulations still has to adhere to a March 15 deadline for having an interim budget for 2009-10. Right now they are working off the Governor's budget assumptions until and unless there are changes and a more certain path.

The Governor's budget builds in cuts in the range of $2.5 million this year (as in 2008-09), another $3.3 million reduction next year with no funding for COLA, and right now no cuts for 2010 but minimal funding for inflation (COLA) and no funding restoration.

The Governor's budget does provide flexibility. Some of the key flexibility is that it allows districts to transfer money from their fund balance for categorical programs. This means that money that is normally restricted in use can be used for the general fund. For a district like Davis, this is a huge advantage. There is however considerable question as to whether this will hold. Democrats are opposed in general to this kind of flexibility for a variety of reasons.

In addition the Governor's budget also allows the district to reduce its reserve requirement. In essence this is one-time money that will quickly get depleted, but it will allow some districts to survive for a couple of years.

Finally, the Governor's budget, and again, this is subject to legislative approval, calls for the reduction of the school year by up to 5 days. More on this shortly.

The good news for the school district is that ADA is up, meaning there is no the problem we faced last year with declining enrollment. The bad news however is that our cash investments are earning less. In fact, we expect negative interests for the rest of the year. In a normal year these interests would yield around $750,000. Right now, Bruce Colby has this budgeted as zero income, it could in fact end up in the negative somewhat by up to $200,000.

Bruce Colby then showed where we currently stand. We are pretty much operating in the red, living off our fund balance and our reserves with no changes this year. And then we would end up in the hole $2.5 million for next year and $7.7 million for 2010-11.

In order for that not to happen, we are going to have to make cuts. The first set of assumptions are based on the ability to alter the student to teacher ratio from 20-1 to 22-1. That would save us $700,000 just for the K-3 and another $300,000 for the 9th and 10th grades. However, as Mr. Colby stated during his presentation, this is not likely to hold. The legislature of all the cuts and changes is most likely to keep the ratio. As you will see shortly, that will alter these assumption by quite a bit as the district will have to find another million.

How is the district going to make cuts with minimum impacts on education programs?

Well they are going to cut from the district office and not fill vacancies for risk manager, fiscal services, account tech, and board secretary. In essence, Bruce Colby will serve as risk manager and the fiscal services director ends up requiring additional work for him as well. That cuts about $200,000 from 2009-10 and 10-11.

Other cuts will include to counseling services and classified staff reduction. Both of those are simply through attrition. They will simply not fill vacancies. It will not require layoffs.

They will have some spending reductions, we're talking about $100,000 there. They think there is some flexibility in unused parcel tax funds where they can shift around for $200,000.
Finally the issue of the reduction of the work calendar. Right now they are discussing two days which would be $500,000. Every day they do not work, it is $250,000. One of the questions is how much of that has to come from instructional days. The board seems willing to double that to four days given the amount of money this would save. Part of this depends on the legislature approving the reduction of school days.

Those cuts still only save about $2.3 million for 2009-10 and $1.8 million for 10-11. The remainder of the money will come this year from the transfer of categorical fund balance. The next two years they will transfer $1.1 million from categorical allocations. They think reductions in restricted funds can give them $400,000 and for this year there was a $200,000 Adult Education Fund Balance that the adult school director volunteered to give back to the district.

With those cuts, you can see that we remain in deficit spending but we remain in the black across this period in terms of ending fund balance. Notice that the reserve is gone though by 2010-11 which means we could be facing problems for 11-12 if the state budget situation does not improve and it is not expected to.

So if the district gets class size reduction flexibility, we are in decent shape.

Without that flexibility, we are still okay but we have $1 million less next year and $2 million less in 2010-11. That means that our fund balance will be almost gone by then and we will really face potential problems in 2010-11.

The bottom line is that we are most likely going to be okay through 2010-11 given current assumptions and hoping that the state budget picture does not get much worse.

From my perspective it is not clear that we will have that categorical flexibility that the governor has built into the budget. But we'll have to see what the legislature and governor eventually decide when they finally agree on a budget.

Of course all bets are off if the state actually starts running out of money has to default on payments to local schools.

---David M. Greenwald reporting