Monday, October 22, 2012

Adding Meeting Material: Proposed Five Year Forecast

Also on tonight's agenda - Item F2 - will be a vote to approve a new Five Year Forecast, as the Board is required to do by law each year.

Here is what it looks like in the graphical format readers of this blog will be familiar with:

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The yellow region highlights the gap between proposed spending and expected revenue. This Forecast shows the difference in FY17 between proposed spending and expected revenue to be $20 million, and our cash balance to be $28 million in the hole.

Ohio law does not allow a public school district to have a negative cash balance, and so that situation will have to be fixed. We have to spend less money that this forecast proposes, generate more money with new local levies, or - more likely - do some of both.

If we want to fully fund the spending plan proposed by the Administration, and stay somewhere close to our 10% cash reserve policy, then I believe - and these are my calculations, not those of the Treasurer - we're going to need to pass a levy on the order of 7.7 mills in 2014. That would look like this:

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A 7.7 mill levy has a slim chance of getting approved by voters, in my opinion. The voters barely - just barely - passed a 5.9 mill levy last time, after shooting down the 6.9 levy issue on the prior ballot.

That means it's finally time to start having the tough conversations. Take a look at the assumptions that accompany the forecast. There's lots of detail, but as always - the lead story is compensation and benefits:

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The dotted line in this chart is where spending was expected to be when the Oct 2010 version of the Five Year Forecast was approved. You can see that total spending is this new forecast is projected to be $20m/yr less in FY15 than was the projection just two years ago. This is the impact of the pay freezes agreed to by the two unions, as well as the many retirements.

This forecast assumes that in the next few years, the compensation for teachers and staff will increase 1% per year in base pay, and that the current step schedule will resume (4.15% in years 0-15, 20 and 23). I recommend that you read this article if you're not familiar with the teachers' pay structure.

I am also concerned about the way our health insurance costs are increasing. Even with a just-approved design change to the benefit structure, our insurance costs look to be increasing 13% next year (it would have gone up 15% without these changes). Remember that we're self-insured, so these costs are equal to the actual claims, plus 9% for our stop-loss insurance and Third-Party-Administrator fee. Also note that the employees are now paying 15% of the cost, up from zero prior to 2008.

Our total compensation and benefits costs - 86% of our total spending - is the product of the number of people we employ, and what we pay them. We may have reached the time when we have to talk seriously about the first term of that equation - how many people we employ.

Please don't just say "chuck out all the administrators."  We run relatively lean at the administrative level, and I'm pretty concerned that all this clamor about more teacher evaluations and performance-based pay is going to significantly drive up the administrative burden as these policies are enacted.

I think we're finally going to have to talk about the breadth of programming and services we offer. I'm trying to gather enough information to start to frame the dialog. But I suspect one or both of these things are going to have to happen: a) we'll have to eliminate some academic offerings and support services, and, b) make our extracurricular programming be substantially supported with user fees.

Everything has to be on the table.


  1. Well then, if everything is on the table, why have they been adding classes in the 6th through 8th grades? My child was able to pick from many electives in the 7th grade! I noticed that the 6th grades added in electives this year as well. I thought we were in a status quo pattern after the levy (remember the "no new programs" promise?)

    1. Good question. I'm working on an analysis of our high school course offerings, trying to understand how the breadth of course offerings interrelates to the student-teacher ratio.

      We have 4,500 students in grades 9-12. If our goal is a student-teacher ratio of 20 (I'm not sure what it really is at this point), then we should need around 225 regular classroom teachers. If we wanted to increase that ratio to 22:1, then the need would be for 205 teachers.

      The cost of 20 teachers is about $1.1 million/yr.

  2. I suppose this is a bit of a hot button issue, but what of talking about changing the guaranteed 5+% pay increases mentioned above? In 20 years of working, aside from changing jobs, I think I've only twice had pay increases of over 5%, and one of those was this last year following no increases for 4 years prior.

    The majority of folks in the private sector have no guaranteed increases and when the increase comes, they take what they get or find other employment.

    I don't disagree with class size and class offerings being important to evaluate, but trimming those directly effects students. These guaranteed, generous pay increases are directly driving costs up and seem to be out of line with the general work environment.

    I have to say, if we need to trim classes, raise fees and put more kids in every class in order to keep giving the staff 5% raises each year, I don't see myself voting for any levy the board puts forth.

    1. I'm glad more folks in the community are beginning to understand the relationship between the compensation agreements, levies and offerings. It goes back to the "Four Knobs" model I wrote about last year.

      If funding is held constant, the increase compensation and benefits costs have to be offset by reducing the total number of employees, which affects the extent of programming and services we can offer. And since the union contracts dictate that the most junior, and therefore least paid teachers and staff members have to be laid off first, it takes a lot of them to be laid off to eliminate a target level of cost (as opposed to the early-retirement incentive we offered, which encouraged the most highly paid individuals to get off the payroll).

      A nuance of the existing pay grid is that the lowest paid half of the teachers get the base + step increase (1% plus 4.15% illustrated in this forecast), while the most highly paid teachers - those with more than 15 years of service, would get only the 1% increase.

      The primary reason Olentangy has a much lower cost per student compared to us is that their growth started in the last 10 years, so most of their teachers on still on the lower part of the grid. Our growth spurt was 20 years ago, meaning that large batch of teachers we hired then are mostly in the upper half of the pay grid.

      But while the rate of salary growth has slowed in the past few years, the cost of benefits - in particular health insurance - has been climbing at an alarming rate.

      In 2012, the School Board's share of our health claims costs (remember we're self-insured) was $17.7m. With no changes to the co-pays, deductibles, etc, our estimated 2013 costs would be $20.4m. The employees did agree to some small changes, which is predicted to bring the cost down to $20.0m.

      That's still a $2.3m increase, which is equivalent to about 1 mill of new property taxes given our current tax base.

      So if we assume there will no new external funding sources, we have to either raise our property taxes by 1 mill, or take $2.3m out of our budget. That's equivalent to about 40 teachers at the low end of our pay scale. Eliminating 40 teachers would certainly be felt in terms of programming and services offered to our students.

      The answer isn't to stop giving our teachers and staff raises indefinitely. But we need to look at salary + benefits costs together as a "total comp" number, and recognize that more of one probably means less of the other. We'll have to sort that out when the union contracts are renegotiated next year.

      And the community has to decide how firmly they want us on the School Board to stand our ground. If the unions and the School Board can't reach agreement, is the community willing to tolerate a work stoppage?

      These will cease being hypothetical questions in just a few months. That's why I believe we need to help as many people as possible to understand these economic relationships - as you have done.