Headed toward financial crisis
The problem: Higher costs, shortage of funds
By Bryan Marshall, Richmond Register:
(Editor’s note: This is the first story in a three-part series about funding issues in Madison County and other Kentucky school districts.)
After nearly $2 million in cuts in the 2007-08 tentative budget, it is no secret that the Madison County School District is in a financial crunch.
The budget approved in May had several staff reductions, including nine teaching positions, 10 full-time substitutes, four and a half teacher aides, 11 and a half special education teachers, six special education aides, one speech position and a technology position.Other cuts included 14 bus drivers and 10 bus aides, a reduction of bus purchases from 10 to five, about $300,000 reduction in technology purchases and an extended day for all district employees.The savings of the reductions were about $1.6 to 1.8 million, said Glenn Marshall, acting superintendent.
The reasoning for the cuts arose out of the need to replenish money from the capital outlay fund, which is used for building projects, that had been moved in the past few years to the general fund
We’ve got two issues,” Marshall said. “One is that we are having trouble meeting our budget today. We’re opening a new middle school in two or three years. That’s $1 million in additional operating costs. In order to do that, we have to have money left over at the end of each year now showing that we can operate it. We don’t have that.”“Those are the reasons we have to get capital outlay back in,” he said. “We want to build a vocational school, a new middle school, another elementary school and renovate Madison Southern High School. We can’t do that unless we get capital outlay back into the construction account.”
During the 2003-04 school year, $281,000 of capital outlay money was used in the general fund.That amount increased to $868,320, $901,080 and $929,610, respectively, in the subsequent three years.There is no capital outlay money in the general fund in the 2007-08 tentative budget.
In addition to the cost of fuel increasing from $230,000 to $580,000 per year over the past several years, several other factors have led to the budget shortfall.
The two biggest culprits are the decrease in state transportation funding and the increase of the amount the district pays into county retirement, Marshall said.While the state fully funded the cost of the district’s transportation several years ago, the amount needed to supplement state funds has increased since the 2004-05 school year.Transportation costs were 95.7 percent funded in 2004-05 by the state, leading to $153,658 in expenses for the district.The past two years have decreased further with 87.8 percent funded, creating a $464,919 shortage in 2005-06, and 81.3 percent funded, or a $807,076 shortfall in 2006-07.The district will have to pay about $843,000 for transportation during the 2007-08 school year because only 80.4 percent will be state funded.
Legislators commissioned a transportation study in the 2006 session of the General Assembly, said state Rep. Harry Moberly, D-Richmond, that will look at the transportation formula and how funding is distributed to districts. The study should be complete by January, he said.
“We’re going to do something, looking at both the total amount of transportation funds and the distribution formula for those funds, in 2008,” Moberly said.“Of course, another factor in that is that fuel cost has gone up greatly,” he said. “That’s been a factor with state police and the whole state fleet, as well as a big factor with local school districts.”
In Madison County, as well as other districts, transportation funding has been decreasing the past several years by the state, forcing local districts to have to pay more and more out of local funds, said Lisa Gross, press secretary for the Kentucky Department of Education’s Division of Communications. “The legislature appropriates funds for transportation, just as it does for other school funding, and that appropriation is based on a number of variables,” she said. “The appropriation also is tied to how much money the state has available for everything that is funded through state monies, not just public schools. This agency supports full funding of the transportation component of the (state funding) formula.“The overall funding has not decreased, it has remained flat, however,” she said. “
Individual districts may see less funding in a given year than previously, and the reasons for that will vary with the district.”The rising costs of fuel need to looked at when determining how transportation is funded for districts, said state Sen. Ed Worley, D-Richmond.“We’re going to have to take into account that we live in an era where we are probably at $2.50 and $3 a gallon gas range and may never see it lower than that until there is stability in the Middle East and we find some alternate fuel sources,” he said. “We’re going to have to assess the amount of money school districts are receiving.”
The percentage that the school district has to pay into county retirement also has more than doubled since 2003-04 when it was 7.34 percent or $470,469.In the following three years, the percentages increased to 8.48 percent ($596,598), 10.98 percent ($833,672) and 13.19 percent ($1,080,469), respectively.The district will be paying 16.17 percent, or $1,404,518, during the 2007-08 school year with the amount projected to jump to more than 28 percent by 2011-12.
“We have to solve the pension issue,” Moberly said. “One of the big, unanticipated costs that districts all across the state are dealing with are their employer contributions in the pension system. The biggest hit is on their classified employees, not their teachers or certified employees, who are not in the teacher retirement system, but in the state retirement system. The employer contributions in that system, because of our pension problem, have gone up dramatically. That has hurt schools districts very much.”
Moberly is serving on the governor’s Task Force on Pension Reform to find a solution to rising costs.“It is important that we come up with some solution to that or school districts are going to be hit with an increasing amount of employer contributions in the future,” he said. “The problem is with the health care cost in the state employment retirement system.”
While the pension issue was discussed during the 2006 General Assembly session, Worley said it needs to be a priority in the 2008 session.“ We have to look how to address the retirement issue so that school districts are not hit so hard that they have to look at understaffing as a means to balance their budget,” he said.
The Madison County School District may have survived within their income, Marshall said, if county retirement had not increased by about $400,000, and if transportation was fully funded.“We’re only funded at about 81 percent for our transportation,” he said. “A combination of all those factors would be the cause of us using capital outlay funds to balance the general fund budget.”“If you put $1.1 million back in our budget from transportation and not having to pay that county retirement increase, we’d be in pretty good shape,” Marshall said.
Headed toward financial crisis — Part 2
Adjacent districts also seeing funding strain
Ed Musgrove did a lot of “soul searching” during his first year as superintendent of the Clark County School District.“When I got here around the first part of August, we found out that our ending balance had placed us back on the (Kentucky Department of Education’s) Financial Watch List, which was the second time in four years,” he said. “We have been working vigorously this year to try to get off that list.”
Clark County was one of only two districts statewide placed on the list because their budgets were close to not having the 2 percent contingency fund required by state law.Because contracts already were approved for the year, Musgrove said there was not a whole lot he could do for the 2006-07 year.However, at the end of May, the school approved a budget for 2007-08 that he said will, by the end of June 30, 2008, allow the 5,200-student district to have a large enough balance to be removed from the list. In the approximately $40 million budget, $1.25 million was cut with most of the money sliced in personnel as 30 employee contracts were not renewed.
Similarly, the Madison County School District made nearly $2 million in cuts in its 2007-08 tentative budget, including nine teaching positions, 10 full-time substitutes, four and a half teacher aides, 11 and a half special education teachers, six special education aides, one speech position, a technology position, 14 bus drivers and 10 bus aides.
Not unique problem
“It’s not a problem unique to Kentucky by any stretch of the imagination,” said Musgrove, who spent 18 years as a superintendent in Missouri, where he said a lot of similar funding issues took place.“I think the real issue for our county is that we really have to look at the local effort toward how we fund education,” he said. “We’re a low-tax county. I think we have to look at our ability to provide the services that the public asks of us, and if there is not going to be anymore SEEK money or federal money, what can we ask our local constituents to do to help us provide those services that are expected?”
The Support Education Excellence in Kentucky (SEEK) funding program is a formula driven allocation of state provided funds to local school districts. The formula includes funding for transportation costs and special needs students as reported by districts.Like all state school districts, Clark County uses the MUNIS system, a financial software package, to report financial information.However, Musgrove said the safeguards and checks and balances that are built into the system were not activated, leading to the district’s financial troubles.“By (turning them on), it allowed us to become very much aware of expenditure items that were approaching or exceeding budgeted items,” he said. “For the most part, it fixed itself. But, we did have to go back and take a really hard look at overall how we were spending money as it relates to instruction versus all the other things we do related to the educational component.”
The district also plans on making major revisions in transportation during the 2007-08 year to try to reduce costs.“The key to transportation is you try to operate your program as efficiently as you possibly can,” Musgrove said. “We went and looked at that, and we had some routing situations that were inefficient. Transportation is a big part of it, but when you look at everything, salaries and benefits eat up 75 to 82 percent of all your budgets around the state. If you want to make meaningful cuts, you have to start there.”
Little wiggle room
Garrard County Schools Superintendent Ray Woolsey also has very little financial wiggle room in his school district’s budget.“We have very little discretionary money to use,” he said. “I’d say almost 95 percent of it is obligated.”“We’re just getting by,” Woolsey said about his 2,600-student district adjacent to Madison County. “Basically, this is a school system that is supported by the county residents. We have very little industry or business to help with the system. When the legislature mandates certain expenditures that are not funded, it puts us in a bind.”
In what seems to be a theme across several districts, Woolsey points to two major issues of concern.“Transportation, for example, is one of those examples where our funding has been going down while fuel prices have skyrocketed,” he said.“Another area of concern is the cost of retirement programs for classified positions,” Woolsey said. “They continue to rise at the rate of 10 to 15 percent a year and that’s projected to go up for the next three to four years, I understand. That’s not funded. As we continue to grow, it just sucks the blood right out of us.”
In population, Garrard is one of the top 10 growing counties in the state, he said, adding that an increase of 50 to 100 students a year, which has been standard lately, is “a big growth spurt for us.”The district was required to make a few cuts for the 2007-08 school year in federally funded positions, Woolsey said.“Each of the our elementaries lost one position because the federal funding had gone down,” he said. “We’ve been able to maintain our positions in regard to state jobs to this point. But, it’s caused us to really do some soul searching.”“We’re going to get by. We’re going to make it again this year,” Woolsey said. “There are no frills. We’re trying to conserve money wherever we can.”
Estill County Schools did not have to lay off any teachers because of the increase in teacher pay mandated by state, but they did have to let a few go because of a decrease in Title I federal funding, said Superintendent Bert Hensley.“Hopefully, we’ll have enough money to make it through,” he said. “I think we’re in pretty good shape, but it could be one of those things that have an effect at the end of the school year.”
In a district that has grown about 750 students in the past six years, Jessamine County has to continue to monitor their finances, said Tim Lemaster, director of finance.“We’re doing OK. It’s not great,” he said about the 7,000-student district. “We’re a little cautious because drops in state revenues can really hurt us.”Because of the county’s smaller geographical size, the cost of transportation is not as big of an issue as in other counties, Lemaster said, but the district still has had to budget considerably more for an increase in fuel costs.
The biggest problem for the Jessamine district in the budgeting process is the lack of information provided ahead of time by the state, he said. “It would help us to have more heads up about what our funding will be in the upcoming year,” Lemaster said. “We have to plan really short term, so it would help to know a year out what the funding will be and what the required raises will be. I know it’s a big dream. Otherwise, it causes you to be more conservative than you would be.”
While he describes his 2,900-student district as stable, Rockcastle County Superintendent Larry Hammond also admitted that there is never enough funding.“When an increase is mandated, typically, the increase in SEEK does not pay for the mandated salary increase,” he said. “That’s the bottom line.”“We have been practicing trying to be conservative,” said Hammond. “We’ve been able to make the staffing portion work through retirements and attrition. We didn’t let anyone go because of the budget.”
The district continually works to reduce transportation expenditures, he said, by eliminating four to five bus routes in his 12-year tenure.“Unless you’re in a totally urban setting, you lose money in transportation,” Hammond said. “We spend several thousands of dollars more than what the state reimburses us.”While Rockcastle Schools may have experience an occasional slight decline in student population, overall, the district enrollment has been steady. “We’ve been basically flat in population for years on end,” Hammond said. “By being flat, it makes it easier to plan.
By comparison in Madison County, they’re experiencing rapid growth. With that, you can’t hardly keep up. If you go to the other extreme and you’re experiencing a decline, that’s probably even more painful than the growth because you’re cutting programs.”
“There are different variables in different districts that cause it to be one year to be more strenuous for us than the next year. It might be more strenuous for Madison County or Estill,” he said.
Having to struggle
While his district is not growing, Ralph Hoskins, superintendent of Jackson County Schools, said money also is tight.“We’re having to struggle,” he said. “It’s just a hard financial time right now for school districts.”“Jackson County is unique,” Hoskins said. “We don’t have a utility tax, and we don’t have the revenue strain that a lot of districts have. We just don’t have the tax base to go with that.”
For the past couple years, the approximately 2,200-student district has grown only a few students, which is an improvement upon the 25-student decrease the district was experiencing a couple years ago.“We’ve had to cut a lot of personnel over the past five years,” Hoskins said. “That makes it awfully hard. We’ve cut it down to the bone.”“Another thing is the high cost of everything — fuel costs for buses,” he said. “We just don’t have enough revenue. What I would love to see happen is (the state) to fully fund transportation and fully fund all-day kindergarten. That would help us tremendously in our district. We just need some more money. I know everybody has financial worries, but we just need some more funding.”
Although the district recently received $5 million in funding to renovate the high school, Hoskins said another $10 million more really is needed to build a new one.The high school is considered a category five high school, meaning that the building is more than 40 years old and it would cost more to renovate than to build a new facility.The district has not raised taxes mainly because the residents recently were hit with a city and county occupational tax.
Everybody can only pay so much,” Hoskins said.“(University of Kentucky President) Lee Todd was at a meeting one time and he said, ‘You can’t cut your way to excellence,’” he said. “That’s what scares me. You have to balance the budget, and that’s hard to do when your cutting services that you need to provide to your children and your school district. We’re striving to be proficient by 2014, and you can’t keep cutting if we really want excellence.”
Headed toward financial crisis — Part 3
Schools, state seek solution
Various studies have proposed that state funding for Kentucky school districts should be increased by hundreds of millions of dollars, according to Lisa Gross, press secretary for the Kentucky Department of Education’s Division of Communications.
“School funding in Kentucky, overall, is not where it should be” she said. “Although the funding system does provide equity, the pool of money is just not big enough. So, districts may struggle over time or have difficulty during a given year, depending on factors such as enrollment, facilities and other expenditure-related items.”
Kentucky has traditionally ranked lower than most states when comparisons are made on the amounts allocated per student for P-12 education, Gross said.The amount of public school expenditure per student in 2005-06 for the state was $8,195, ranking Kentucky 31st in the nation, according to fall 2006 rankings and estimates by the National Education Association.Washington, D.C., and Utah were first and last in the rankings, respectively, with $15,864 and $5,347 per student.
The seven adjacent states to Kentucky — Illinois ($10,271), Ohio ($10,034), West Virginia ($9,790), Virginia ($9,275), Indiana ($8,978), Missouri ($7,680) and Tennessee ($7,079) — ranked 11th, 17th, 18th, 21st, 23rd 39th and 45th, respectively.
The state always has to acknowledge the increase cost of education, said state Sen. Ed Worley, D-Richmond.“That is a core responsibility in our budget,” he said. “About 60 percent of all dollars in the state budget currently goes to education, all of education. As we privatize in other areas of state government, find savings and reductions, as the economy grows and additional revenue exists, we need to appropriate additional money from the state level.”
“(Kindergarten through 12th grade) are the most crucial years of a child’s development,” Worley said. “There has been significant improvement in funding over the past few years with the development and changes in the SEEK formula. But, as far as adequately funding for the full needs, until all of K-12 have the technology they need, the classroom sizes that they need and until teachers are compensated to a level that is fair and comparable to surrounding states, then it’s underfunded.”
We’ve made great progress since 1990,” state Rep. Harry Moberly, D-Richmond, said about the rankings. “At one point, we were ranked 47th or 48th. But, it is my goal to get it down more. Our kids are starting to perform at the national average or above on tests. I continually talk about the need for more money, at the same time as we have more accountability. If we put more money in, we expect more results.“I’m a strong advocate for squeezing every dollar we can out of the budget for education,” he said. “I think the greatest responsibility in the General Assembly and the governor is to assure that we have a good system of education P-20 (pre-school through college).”
However, Gross said it is a positive sign that the 2006 General Assembly added more funding to the state formula.“We have greatly increased the amount of K-12 money in the budget since 1990,” Moberly said. “Our last full budget in 2006, I think was the best education budget that we ever passed. But, we’re going to have to go in 2008 and address the issues (school districts have.) We’re still not funding elementary and secondary at a high enough level.“We need more money, particularly in preschool,” he said. “We need to improve our test scores across the board. We need more teachers. We’re going to need to do more. I’m committed to doing more, and I always have been.”
Elementary and secondary education has always been the legislators’ number one priority, he said.“It has lost some share in terms of percentage in the budget, not dollars, because the dollars have been going up greatly,” Moberly said. “But, in terms of percentage, it’s lost some ground since 1980 because of the amount of money we’ve had to put in Medicaid and prisons.
We think we’re starting to get a handle on those costs with some new and innovative ways of looking at those. So, education remains our top priority. I think 2008 needs to be a session where we show what a priority education truly is for us.”
Two of the state’s 174 school districts were on the Kentucky Department of Education’s Financial Watch List at the end of 2006.The Clark County and Ludlow Independent school districts were placed on the list because their budgets were close to not having the 2 percent contingency fund required by state law. There usually is no more than five districts on the list within a given year with the average being two to three districts, Gross said.“We monitor districts’ financial status to ensure that they have at least that 2-percent reserve, and we offer resources and assistance when the contingency gets close to the required level,” she said.
“Madison County was not one of those districts.”KDE staff works with districts to help them implement sound business practices and make the most of the funding they receive, she said.
The state Department of Education and the Kentucky Board of Education continue to encourage and support expanded funding for the state formula, along with growth taxes that would benefit districts that experience rapid enrollment growth, Gross said.“Growth is a big issue in a number of districts, and it is cyclical, meaning that a district usually experiences rapid growth over a period of time, then levels off for a while,” she said. “Every year, some districts struggle with growth, which affects their financial status in a variety of ways. But, once district officials adjust to the growth, the district tends to bounce back.”
All districts have enacted local taxes, ranging from utility to “growth nickels,” which the Madison County School District has two of for building purposes, in order to raise revenues.For the 2007-08 school year, the Madison County School District, will derive 65.7 percent ($38.7 million) of its general fund budget from state funding, 33.9 percent ($19.9 million) from local sources, including property taxes, utility taxes, franchise taxes, motor vehicle taxes and delinquent taxes, and less than 1 percent from miscellaneous funding.The district also receives about $7 million in federal funding separate from the general fund.The total budget is about $64.2 million with $5.3 million of that carried over from the 2006-07 school year.
While districts do have the ability to increase taxes by a particular amount or attempt to have a referendum to raise taxes to improve revenue, Moberly said he disagreed that more funding should come from local sources.“Kentucky is in the top five in percentage of state contribution (to school districts),” he said. “We have traditionally been a much larger state contributor than a local contributor, although the local money is very important. I believe it’s a consensus politically of the people of Kentucky, including Madison County, that they want to continue that heavy state participation, and they don’t want to do anything where they’ll be paying a lot more local taxes.”
There is no one answer that covers all of the state’s school districts about whether putting more demand on local sources for revenue for school districts, Gross said.“In some districts, raising the level of local effort is the best solution,” she said. “In others, more state funding would be of greater help. And, for still others, some combination of the two would be most effective. Given that there’s a limited pot of money, it’s more a matter of sound fiscal policy, rather than counting on a great windfall, that will help districts manage funding successfully.”
SEEK can hurt
One way the Madison County District gets hurt with the state SEEK formula, said Glenn Marshall, acting superintendent, is when the county’s existing property values increase by more than 4 percent because the district can only receive 4 percent more than the previous year.The Support Education Excellence in Kentucky (SEEK) funding program is a formula driven allocation of state provided funds to local school districts. The formula includes funding for transportation costs and special needs students as reported by districts.“If they increased 7 percent, our SEEK formula assumes we get a 7 percent increase, so they reduce SEEK based on that 7 percent,” he said. “But, we can only get 4 percent. That’s cumulative over the years. So, we’ve been hurt by hundreds of thousands of dollars over the years from that rule. A lot of districts like us that have increasing property values are hurt by that.”
“New property coming on helps us a lot,” Marshall said. “But, when new property comes on, that is additional children. Therefore, the money from the new property is supposed to generate income to serve those children. But, when we get reduced because of the older property increasing more than 4 percent, then that is a setback.”
Moberly admits that there are several factors in the SEEK formula that need to be looked at, including Marshall’s concern about property values.“We’ve been hesitant in the past to change that because anytime you change something, there are winners and losers because there is only so much money that goes in,” he said. “But, that’s an issue that we have to talk about because that’s not fair to those districts that have that phenomenon happen. I’m going to try to do something about that this time.”Studies have shown that SEEK is equitable, Gross said, because it provides weights for a variety of items whose “worth” will vary from district to district.
Equitable, not equal
“SEEK is designed to provide equitable state funding, rather than equal funding,” she said. “More funding for SEEK would help all districts, including Madison County. And, more flexibility for districts to level “growth” taxes also would be helpful.”
In the past 20 years, four independent districts have merged with their county counterparts with financial considerations being the primary reasons for the merger.Gross, however, said communities should remain optimistic about their school district.“I’d encourage those who are concerned about a district’s financial situation to have confidence that district officials work hard to ensure that students get the support they need in school, and that means they are focused on implementing good business practices,” she said.
There is no easy solution to any district’s financial struggles, Gross said. “Sometimes, those resolve themselves when state funding is allocated, if the issue is that the district experiences unforeseen growth or has a one-time major expense,” she said.“Sometimes, it takes a thorough review of fiscal practices and assistance from our staff to help the district get back on track,” she said. “The issue is not equity, but adequacy — more funding for the state SEEK formula will help all districts and balance out local funding.”
Kentucky constantly has to be thinking about creating a more stable economy and a more stable source of revenue, Worley said, so when there is a major industry dip because of a recession, the state still has the ability to address core needs, such as education.“The first thing that Harry and I will do before the 2008 session of the General Assembly is meet with the superintendent and members of the board of education,” he said. “We’ll learn from them exactly what caused them difficulty and whether or not it’s the anomalies that are in the SEEK formula where often times some of the more prosperous districts have a penalty as opposed to some of the less prosperous districts. We’ll do an assessment in terms of their financial needs so that cuts don’t have to be made.”