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BUDGET PRESENTATION

BUDGET PRESENTATION. Bay City Public Schools Finance and Budget Issues Douglas L. Newcombe MBA/ CPA Director of Finance and Accounting. Articles Throughout Michigan. BAY CITY TIMES -January 2006 Michigan needs a taxpayers’ bill of rights to create prosperity, keep its people

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BUDGET PRESENTATION

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  1. BUDGET PRESENTATION Bay City Public Schools Finance and Budget Issues Douglas L. Newcombe MBA/ CPA Director of Finance and Accounting

  2. Articles Throughout Michigan • BAY CITY TIMES -January 2006 Michigan needs a taxpayers’ bill of rights to create prosperity, keep its people • As the state that ranked last in income growth last year, and the only state not hit by a hurricane to have lost jobs, Michigan is anything but the picture of prosperity. – Leon Drolet-House of Representatives

  3. SAGINAW NEWS – January 2006 -Saginaw Public Schools- School Pay Cuts Floated • Saginaw Schools cut $4.2 million in 2004-05, $3.45 million in 2005-06, and are expected to cut $5.5 million in 2006-07. (Note: Fund Balance has dropped from over $12 million to $6 million) • Saginaw school leaders could ask all employees to agree to a 5% wage concession…. • Other cuts could include closing schools under 180 students, close a middle school, reduce special education costs, eliminate library/media aides by 50%, increase class size to contractual limits, reduce transportation costs, and go to a four day week with longer days.

  4. WASHINGTON BUREAU – January 2006 Michigan public employers face staggering legacy costs • Pricey pension and health benefits for retirees could soon threaten the financial stability of Michigan’s state and local governments. • We can’t continue these entitlement programs without destroying the economic underpinning of government. • These costs are unsustainable, and we need to find a solution as soon as possible. - Mike Boulus, Executive Dir. Presidents Council State Universities

  5. THE GRAND RAPIDS PRESS – January 2006 Tight budgets choke district contract talks –Holland Public Schools • Tight budgets are making labor negotiations difficult. • 15 West Michigan school districts, have joined the new West Michigan Health Insurance Pool - hoping to collectively get volume discounts on MESSA. • Containing health-care costs is critical to staying fiscally afloat in these tough economic times.

  6. Budget reductions of more than $2 million in budget costs for next year to cope with rising health-care and retirement costs, coupled with slow enrollment growth and essentially flat state funding. – Zeeland Superintendent Gary Feenstra • During the last 10 years the number of workers in the State’s auto industry has declined from 600,000 jobs to 150,000 jobs. Currently only 5% of Michigan’s workforce is in the automotive industry. – Dana Johnson, Tri County Economics Club

  7. ANN ARBOR NEWS – January 2006 Tight budget may delay kindergarten expansion – Chelsea school board: All-day program not affordable right now • District is spending more than it takes in this year and expects to be in a similar situation next year and possibly the following year. • Although state funding increased for this school year and projections are for a $150 to $200 per-pupil increase next year, increase in costs for pensions and health care will exceed the revenue increase. • Even with the most optimistic forecast of revenue increase, the expense side will continue to outstrip the revenues- Shawn Lewis-Lakin- Chelsea Schools

  8. GRAND RAPIDS PRESS – January 2006 Holland Public Schools -offers five options for next round of school closings —What’s your favorite color? • Closing buildings will minimize program cuts. • They have a 2.5 million -revenue shortfall. • Parents complained about the number of transitions required of your children. • The District can’t maintain to keep all its buildings open and make the 2.5 million in cuts. – Brian Davis, Superintendent

  9. GRAND RAPIDS PRESS – January 2006 East Grand Rapids Schools - $600,000 school deficit projected • Even with school funding increase of $150.00 per pupil next year, it won’t be enough… • Health insurance rates climb another 15% in the coming year – retirement rate costs increasing 13%! – Doug Derks- East Grand Rapids

  10. GRAND RAPIDS PRESS – January 2006 Allendale Public Schools School Cuts may be unavoidable • District leaders have so far avoided increasing class sizes, cutting staff costs or shaving programs like busing. • We are first in line at the edge of the cliff, but everyone is making steady progress toward it…-Dave VanderWall, Allendale Schools

  11. KALAMAZOO GAZETTE – January 2006 Lost jobs, lost students - Area’s school numbers drop as families leave state: • 26 of 36 districts in the Kalamazoo area have seen their numbers drop since 2003-2004 • The region now has 1130 fewer public-school students… • Michigan had the nation’s second-highest percentage of moves out of the state… • The # of public school students has dropped 1% • #1 reason: Families leaving Michigan-Mary Ann Cleary- House Fiscal Analyst

  12. KALAMAZOO GAZETTE – January 2006 Allegan Public Schools-Superintendent not thrilled with curriculum proposal…. • With new State requirements for math and science and the money crunch…if we need to hire an additional math teacher, we’re going to have to find a teacher somewhere to lay off-Kevin Harness-Allegan Schools

  13. Farmington Schools – receives $10,500 per pupil. They had a 29 million fund balance 3 yrs ago. • For 06-07 the District will reduce its budget by 15 million which will lay-off 40 teachers and 30 support staff. By the end of 07-08 the District will have no fund balance.

  14. BAY CITY TIMES-February 2006 Pinconning Schools considering budget cuts • The time has come for “meaningful cuts” to help offset an anticipated $1.1 million shortfall during 06-07. • We can’t wait to hit the bottom before we decide to start making moves. • The moves will likely include layoffs. • The district hosted a public input session, much comment received centered around the costs of health care in the district.

  15. THE SAGINAW NEWS –January 2006 Bridgeport lays off 2 teachers midyear…. • “In 33 years, I have never experienced a layoff …”-Bridgeport Teacher • School leaders aren’t sure whether more employees will lose their jobs in the 2nd semester…

  16. Michigan’s Budget Crisis and the Outlook for School Funding Middle Cities Education Association January 18, 2006 Detroit Tom Clay, Director of State Affairs Citizens Research Council of Michigan www.crcmich.org

  17. Five Years of Budget Problems • Worst Since World War II • Declining General Fund Revenues • Slow Growth in School Aid Fund Revenues • Structural and Cyclical Deficits at Play • General & School Aid Funds Affected

  18. General Fund & School Aid Operating Deficits

  19. Causes of Michigan’s Budget Problems • Weak Economy • Tax Cuts • Stock Market Decline • Michigan’s Deteriorating Share of Auto and Light Truck Market • Structural Imbalance Between Revenues and Spending

  20. How Weak is the Economy? Michigan’s Recent Statistics: • 50th in Personal Income Growth • 46th in Unemployment Rate • 48th in Employment Growth (Decline for Michigan) • 49th in Index of Economic Momentum (Population, Personal Income, Employment)

  21. General Fund Revenues

  22. Beyond FY2006: The General Fund Structural Problem Continues • Expenditure Causes • Medicaid • Corrections • Revenue Causes • Antiquated Revenue Structure • Revenue Sources Unresponsive to Economic Growth

  23. FY2007 Spending Pressures • Retirement-Rate Could Rise From 16.34% to 18.9% $150 Per Pupil • Employee Health Insurance Averages More Than $1,000 Per Student and Could Rise By $100 Per Student or More • Pay and Step Raises Cost About $50 Per Student on Average-3% = $150 Per Student • Total Could Exceed $400 Per Student • Not Enough Revenue Growth to Cover All Cost Pressures

  24. School AidStructural Deficit Spending Pressures Outpace Revenue Growth • Retirement Contributions • Employee Health Insurance • General Pay Raises • Revenues Growing Slowly

  25. Employee Health Insurance • Double-digit Premium Increases Recently • Schools Spend About $1,000 Per Pupil on Health Insurance Premiums • Annual Increases Around $100 Per Pupil Likely For Next Several Years

  26. Employee Salaries and Wages • Largest Component of School Budgets • General Raises and Step Increases Add to Payroll Costs • Each Percentage Point of Increase in Payrolls Costs About $50 Per Pupil • Total Payroll Increase of 3% Would Cost About $150 Per Pupil

  27. Structural Deficits Require Structural Changes • Expenditures • Retirement Costs—Retiree Health Care • Health Insurance • Change Programs • Revenues • Broaden Base of Sales and Use Taxes • Eliminate Some Tax Expenditures

  28. Who Can Change the Structure? • Influence of School Boards or Local Voters Very Limited • State Controls Most Financial Policies • Retirement Contributions and Benefits • Tax Rates and Taxable Items • Total Revenue Received By Districts • Areas of Local Control or Influence • Employee Compensation • Instructional and Other Programs

  29. Objectives For 2006-2007 Through 2010-2011 • LONG-TERM BUDGET PLANNING IS NEEDED FOR FINANCIAL STABILITY: THE MORE WE CORRECT THE BUDGET ISSUES FOR 2006-07 WILL HELP RESTORE FINANCIAL STABILITY IN FUTURE YEARS AND AVOID MORE REDUCTIONS IN THE LONG-TERM. • RE-ESTABLISH A FUND BALANCE IN BOTH THE SHORT AND LONG TERM: 1%-2% MIMIMUM IN 2006-2007 AND THIS MUST BE BUILT UP OVER THE NEXT SEVERAL YEARS.

  30. Objectives For 2006-2007 Through 2010-2011 • RESTORE PRIMARY NEEDS IN THE DISTRICT THAT WERE CUT IN PREVIOUS REDUCTIONS: • TEACHING SUPPLIES - $250,000 (THIS IS 25% OF THE $1 MILLION SUPPLY REDUCTION) • COUNSELING AND LIBRARY SERVICES $250,000 • AS WE MOVE FORWARDIN FUTURE YEARS AND DEPENDING ON WHAT WE DO –AND STATE FUNDING –WE WANT TO CONSIDER RESTORING MORE IN SUPPLY AREAS, COMPUTER LAB AIDES, AND THE MIDDLE SCHOOL CONCEPT.

  31. Objectives For 2006-2007 Through 2010-2011 • PLAN FOR BUDGET ADDITIONS TO MEET NEW STATE MANDATES AND CURRENT PROGRAM NEEDS: • SHORT AND LONG-TERM NEEDS FOR CLASSROOM COMPUTERS AND ROUTERS - $250,000 • NEW FINGERPRINTING UN-FUNDED MANDATE FROM STATE - $70,000 • NEW CURRICULUM REQUIREMENTS FROM STATE THAT WILL HAVE SIGNIFICANT COST IMPACT AND ARE UN-FUNDED MANDATES- $80,000. (EXAMPLES OF EXPENSES ARE NEW TEXTBOOKS, AND NECESSARY PROFESSIONAL DEVELOPMENT)

  32. Objectives For 2006-2007 Through 2010-2011 • AFTER 4 YEARS IT IS APPARENT FUNDING IS A CONTINUING LONG-TERM PROBLEM, PROGRAMS AND SERVICES SHOULD DRIVE THE BUDGET AND NOT COMPENSATION COSTS. EXAMPLE: DISTRICT HAS MADE OVER $17 MILLION IN REDUCTIONS THE PAST FOUR YEARS TO OFFSET INCREASING COMPENSATION COSTS. UNLESS STATE FUNDING DRASITCALLY IMPROVES, THE DISTRICT WILL CONTINUE REDUCING PROGRAMS AND SERVICES IN THE FUTURE.

  33. ASSUMPTION #1 • RISING EMPLOYMENT COSTS : • HAVE BEEN AND WILL CONTINUE TO BE THE BIGGEST COST PROBLEM WITH OR WITHOUT NEW STATE FUNDING • WAGES: • 1% INCREASE IN SALARY IS ADDITIONAL $500,000. • TOTAL SALARY COST IS $43,000,000. • HEALTH INSURANCE PREMIUMS: • CURRENTLY $14,500 PER EMPLOYEE PER YEAR. • DISTRICT SPENDS OVER $12,000,000 ANNUALLY.

  34. STATE RETIREMENT: CURRENTLY ADDITIONAL 16.34% COST ON PAYROLL. DISTRICT SPENDS: $7,000,000 ANNUALLY. ANTICIPATED FOR 2006-2007 IS A 18%-19% RATE.

  35. STEPS/LONGEVITY: • ADDITIONAL $1,100,000 EACH YEAR – ALL EMPLOYEES • SOCIAL SECURITY: • CURRENTLY ADDITIONAL 7.65% COST ON PAYROLL. DISTRICT SPENDS OVER $3,400,000 ANNUALLY. • RATE NOT ANTICIPATED TO CHANGE FOR 2006-2007.

  36. Percentage Increase in Health Insurance Premiums Last 5 Years • 2001-2002 7.40% • 2002-2003 17.87% • 2003-2004 17.57% • 2004-2005 17.92% • 2005-2006 12.40% • 2006-2007 12.00% (estimated) TOTAL INCREASE: 85.16%

  37. PERCENTAGE INCREASE IN MANDATED RETIREMENT % OF PAYROLL • 2001-2002 12.17% • 2002-2003 12.99% • 2003-2004 12.99% • 2004-2005 14.87% • 2005-2006 16.34% • 2006-2007 18-19% (ESTIMATED) % INCREASE IN RATE SINCE 2001-2002 = 56%

  38. HOW DO WE PAY FOR THE ANNUAL INCREASING COSTS? WHAT DOES THIS MEAN?

  39. THIS MEANS…. • In order to pay these costs, either the State increases Funding $462 each year which is 6.7% OR • District must reduce other places by $4,000,000 EACH YEAR – assuming same student count OR • Combination of reductions & some added funding if received • THE B.C.P.S. HAS CUT OVER:$17,000,000 IN THE LAST 4 YEARS AVERAGE OF $4.25 MILLION EACH YEAR.

  40. State Aid Funding vs. Compensation Expense Trends

  41. HEALTH AND RETIREMENT COST TRENDS

  42. ASSUMPTION #2 STUDENT COUNT WILL CONTINUE TO DECREASE SIGNIFICANTLYBECAUSE OF LOWER BIRTH RATES, SCHOOLS OF CHOICE, AND ECONOMIC CONDITIONS. • STUDENT COUNT 2000-01 = 10,018  • ESTIMATED STUDENT COUNT 2006-07 = 9,300 • TOTAL DECREASE OF STUDENTS = 718 LOSS OF REVENUE AT $6,875 PER STUDENT= $4.9 MILLION EACH YEAR.

  43. Example Of Impact Of Student Loss… • In 2005-2006 student foundation went from $6,700 to $6,875 BUT student count dropped from 9,846 to 9,586. HOW DOES THIS LOSS IMPACT THE BUDGET? • Even though the per pupil funding was increased, the District ended up with less total funding than the prior year: Funding in 2004-2005: $6,700 x 9,846 =$65,968,200 Funding in 2005-2006: $6,875 x 9,586 = $65,903,750 2005-06 Funding is actually less by = $ 64,450

  44. STATE AID HAS GONE FROM $4,400 TO 6,875 FOR BAY CITY SINCE 1994. WHAT DOES IT MEAN FOR US:$6,875 __$4,400   = $2,475 DIFFERENCE DIVIDED BY 11 YEARS = $225 PER YEAR AVERAGE

  45. BUT: TO KEEP PACE WITH COMPENSATION COSTS, STATE FUNDING WOULD HAVE TO INCREASE AN AVERAGE OF $400 PER YEAR. THAT WOULD MEAN - $400 EACH YEAR   x 11 YEARS = $4,400

  46. AND THAT :  WOULD MEAN THE FOUNDATION GRANT WOULD HAVE TO BE: $4,400 FOR 1994 -1995 + $4,400 ADDITION NEEDED = $8,800 FOR 2005 - 2006 THAT WOULD BE AN ADDITIONAL $18 MILLION IN REVENUE AND WE HAVE CUT $17 MILLION FROM THE BUDGET.

  47. ASSUMPTION #3 UNLESS SOMETHING CHANGES DRASTICALLY, SCHOOL DISTRICTS SHOULD NOT EXPECT ANY MEANINGFUL HELP FROM THE STATE TO HELP EITHER WITH HIGHER, MORE EQUITABLE FUNDING OR COST CONTAINMENT. • LEGISLATIVE EFFORTS TO REFORM SCHOOL EMPLOYEES HEALTH INSURANCE AND RETIREMENT COSTS ARE GOING NOWHERE AT THIS POINT. • DESPITE THE SEVERITY OF BUDGET PROBLEMS ACROSS THE STATE AND EVEN SOME DISTRICTS NEAR BANKRUPTCY, THE LEGISLATURE APPEARS UNABLE OR UNWILLING TO CHANGE FUNDING.

  48. DESPITE TAX CUTS DURING THE LAST DECADE BEING A SIGNIFICANT REASON FOR SCHOOL FUNDING PROBLEMS, MORE TAX CUTS ARE PROPOSED IN THE FUTURE. • THE K-12 SCHOOL COALITION’S BALLOT PROPOSAL OF ANNUAL 5% INCREASES FOR SCHOOL DISTRICTS WHILE IMPORTANT WILL NOT BE AVAILABLE TO HELP IN 2006-07. FURTHER NO ONE CAN PREDICT IF VOTERS WOULD APPROVE IT. • DURING THE 1990’S UNDER PROPOSAL A, THE FUNDING ADEQUATELY MET EMPLOYEE CONTRACT COSTS.

  49. DURING THE LAST 5 YEARS, THE STATE’S TRACK RECORD FOR FUNDING INCREASES HAS NOT BEEN GOOD OR SUFFICIENT TO COVER THOSE COSTS: • STATE AID PER PUPIL IN 2001-2002 = $6,500 • STATE AID PER PUPIL IN 2002-2003 = $6,700 AND CUT MID-YEAR TO $6,621 • STATE AID PER PUPIL IN 2003-2004 = $6,700 AND CUT MID-YEAR TO $6,616 • STATE AID PER PUPIL IN 2004-2005 = $6,700 • STATE AID PER PUPIL IN 2005-2006 = $6,875

  50. ASSUMPTION #4 GIVEN THAT THE STATE’S ECONOMIC HEALTH HAS BEEN AND WILLCONTINUE TO BE BAD IN THE FORESEEABLE FUTURE, SCHOOL DISTRICTSCANNOT CUT THEIR WAY OUT OF THIS PROBLEM ONE YEAR AT A TIME. • MANY DISTRICTS HAVE BEEN IN BUDGET CUT MODE FOR THE PAST 4 YEARS AND HAVE ALSO SIGNIFICANTLY REDUCED OR WIPED OUT THEIR FUND BALANCES. • WITHOUT SIGNIFICANTLY MORE FUNDING, THE ONLY WAY SCHOOL DISTRICTS CAN REDUCE FUTURE CUTS IN PROGRAM AND SERVICES OR AVOID BANKRUPTCY IS TO DEAL WITH THE STRUCTURAL IMBALANCE BETWEEN MONEY RECEIVED AND COSTS SUCH AS HEALTH INSURANCE, RETIREMENT, AND STEPS/LONGEVITY WHICH ARE BY FAR THE BULK OF COST INCREASES EACH YEAR.

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