south orange – maplewood school district 2007-08 budget development november 20, 2006

South Orange – Maplewood School District

2007-08 Budget Development

November 20, 2006

November 20, 2006 2007-08 Budget Development 2

2007-08 Budget

Continuing Impact of S1701 on Budget Management and Preparation

S1701 was a major change in the school funding formula intended to limit school spending. It was passed in June 2003

by the Legislature in a rushed manner with little discussion and no opportunity for public comment.

[Commissioner Guidance for preparation of the 2007-08 Budget is not yet available]


S1701

Legislative Intent:

Short-term property tax relief

Greater accountability to the local voters

Educational Impact:

Constraints on funding a quality education

Continuing cuts in the face of cost increases out of

local district control


The Rules Changed: S1701

Limit on CAPChange in use of CAP adjustmentsRestrictions on use of Separate Proposal(s)Limits on administrative costsLimits on allowable free balanceRestrictions on use of free balanceRestrictions on transfers within budget

accounts


Limit on CAP

• CAP is the limit on the amount of money that can be raised to fund the school budget.

• Allowable increase tightened from a maximum of 3% to a maximum of 2.5% or CPI, whichever is greater

• CPI was 4.04% for the 2006-07 budget


Limit on CAP: What it means to SOMSD:• The maximum permitted net budget for 2007-08 is estimated to be about $91.2

million. • This amount is $3.2 million (4%) more than the current budget.• School district budgets across the state have historically risen at much greater

rates – just to maintain the existing level of programs and services.

• In the recent past, SOMSD budgets have grown from 4% to 8%:

– 2002-03 $3,434,526 (5%)

– 2003-04 $4,482,947 (6.5%)– 2004-05 $6,071,327 (8%)– 2005-06 $3,292,446 (4%)– 2006-07 $5,251,810 (6%)

• These increases are in line with other districts: our spending per pupil continues to be below the state average.


Expenditures would have to increase more than the allowed $3.2 million just to maintain the current level of programs and services.

Major cost drivers expected to increase more than 4%:• SOMEA negotiations underway.• Industry trends for health benefit increases range

from 12% to 19%.• Insurance and fuel are expected to increase in the

double digits.• Building maintenance costs continue to rise given the

age of our buildings.


Illustration: Stringent CAP limits create shortfall in revenues needed to maintain existing programs/services:

potential $ inc.SOMEA 2006-07 salaries: $44,100,000

Assume increase if SOMEA settlement is 4.4% $ 1,940,608Health benefits: $8,800,000Assume 15% increase $ 1,320,000(industry trends range 12% -19%)

$ 3,260,608Allowable budget increase at 4% CAP: $ 3,237,055Shortfall in allowable revenue ( CAP): $ 23,553

(before addressing increases of other cost drivers such as fuel and insurance)


Change in use of CAP adjustments:

• Statutory Growth Limitation Adjustments allow increases to CAP for certain cost drivers.– Changes in enrollment– Capital outlay expenditures– Pupil Transportation– Incremental increase in special education costs in

excess of $40,000– Costs for opening a new school facility


New calculation for the transportation adjustment:• Prior adjustment provided prorated share of

the cost of transporting non-remote riders.

• New calculation is the incremental increase between 06-07 cost and the 07-08 cost adjusted by the CPI.


Change in Use of SGLAs: What it means to SOMSD:• Use of SGLAs increases spending authority, not the

amount of state aid.• For example, 2006-07 SGLAs increased CAP $1.4

million, reducing the amount cut to stay under CAP • It is not likely that significant use of SGLAs will be

available in the 2007-08 budget.• The pupil transportation SGLA no longer allows an

adjustment to cover cost increases for Marshall-Jefferson pairing or Seth Boyden Demonstration School.


Restrictions on Use of Separate Proposal for Expenditures above CAP• Cannot be used to fund any program or service that

was part of the previous year’s budget.• Cannot be used to fund any new programs or services

that are needed to meet the Core Curriculum Content Standards.

• District must demonstrate that all potential efficiencies in administrative operations are in effect.

• County Superintendent can reject if the district’s administrative costs are too high in his/her opinion.


Restrictions on Use of Separate Proposal: What it means to SOMSD:• Separate proposals have been used in past

budgets to provide a range of non-T&E items that would not fit under the CAP.

• Items totaling $900,000 were funded by separate proposal in 2006-07 budget. Included were 9.5 FTEs for programs and services.

• Final decision-making assigned to county-state administrators even if locally supported.


Limits on Administrative Costs

• CAP within a CAP• Per pupil costs for 2005-06 could not exceed the lower of:

– the 2004-05 costs, adjusted by the CPI, OR – the regional administrative “amount”.

• Beginning in 2006-07, administrative spending is further restricted: it could not exceed the 2005-06 amount. Commissioner can approve an increase not to exceed the inflation factor.

• Does not matter if district administrative costs are lower than the regional “amount”.

• County Superintendent may reject the entire budget if costs are too high in his/her opinion.


Administrative costs include much more than administrator salaries.General Administration:

• BOE expenses, elections, negotiations, meeting expenses, legal advice, auditing services.

• Salaries and benefits, supplies and materials for Superintendent’s Office, community relations, state/federal relations.

• District-wide costs for telephone, communications, postage, legal ads, liability and fidelity insurance.


Administrative costs (cont.)

School Administration:

• Salaries and benefits for principals, assistant principals, other assistants, clerical staff.

• Salaries and benefits for directors of guidance, athletics, and special education

• Supplies, postage, printing, copiers, paper, furniture and lockers, professional subscriptions and memberships, etc.



Central Services• Salaries and benefits, supplies, postage, furniture,

memberships and other expenses of the business office and human resources

• Fiscal services including purchasing, budgeting, financial and property accounting, payroll, funds management, inventory control

• Human resources recruitment, placement, maintaining personnel information

• Strategic planning including conducting and managing programs, research, development and evaluation.



Information Technology

• Salaries and benefits to support administrative networks, maintaining administrative information systems and processing data for administrative and managerial purposes.

• Includes hardware maintenance and repair, licensing, support personnel, etc.


Limits on Administrative Costs: What it means to SOMSD:• Administrative costs budgeted for 2006-07 were

$8,156,460 -- less than 10% of budget. • BOE held increases in all administrative salaries to

2.5% through 2006-07.• Salaries and benefits make up about $6.5 million

(80%) of administrative costs.• $1,294 per pupil cost well below regional average of

$1,603 per pupil.

• No increase allowed for 2007-08.


Limits on Administrative Costs: What it means to SOMSD (cont): Restrictions on administrative costs do not take into

account growing demands on administrative time, including increased:

• Need for attention to individual student to improve educational achievement.

• Assessments, record-keeping and reporting demanded by NCLB and other federal/state mandates

• Supervision, observation, evaluation, support and mentoring of new teaching staff.


Limits on Allowable Free Balance

• Any amount in excess of 3% of expenditures returned to taxpayers in 2004-05.

• Any amount in excess of 2% of expenditures - returned to taxpayers in 2005-06.

• Excess amount used for property tax relief.

• The excess determination is made twice, once during budget development and again during the annual audit.


Limits on Allowable Free Balance: What it means to SOMSD:• $575,000 -- returned to taxpayers in 2004-05• $800,000 – returned to taxpayers in 2005-06 • $635.000 – returned to taxpayers in 2006-07• $1,250,000 has been reserved and will be budgeted

toward reducing taxes in the 2007-08 budget.

• The maximum unreserved free balance allowable after the 2005-06 audit is $891,747.

• This will bring the unreserved fund balance to 1.11% of the 2005-06 expenditures.


Limits on Allowable Free Balance: What it means to SOMSD:• Free balance is a contingency fund for

unanticipated expenses.

• Board policy has always sought to maintain a minimum amount equal to 3% of expenditures to deal with the unexpected without creating fiscal shocks to the district.

• An amount between 3% and 6% is considered prudent fiscal management.


Limits on Allowable Free Balance: What it means to SOMSD:• Potential lack of sufficient funds for

unanticipated expenses during the school year.

• Further loss of local control.

• Possible reduction in credit rating resulting in higher interest costs at a time when bonding for major capital projects is needed.

• Short-term tax relief may result in a spike in property taxes beyond 2007-08.


Restrictions on Use of Free Balance

• Transfers from free balance can only be made between April 1 and June 30.

• Use of free balance requires the approval of the Commissioner of Education.


What it means to SOMSD:

• Restricts the ability to pay for emergencies and unanticipated expenses as school year progresses.

• In 2002-03, $911,000 transferred to cover: unanticipated legal settlements, energy costs and snow removal, insurance, repairs due to frozen pipes, ceiling collapse and compressor control replacement.

• In 2003-04, $500,000 transferred to cover: energy costs due to severe weather, unanticipated increases in out-of-district tuition, flooding and roof repair.

• Further loss of local control and flexibility.


Restrictions on Transfers

• Transfers within budget accounts must be under 10%.• Requires 2/3 approval of BOE members for

cumulative transfers of more than 10%.• Also requires County Superintendent and Regional

Assistant Commissioner approval for cumulative transfers of more than 10%.

• Additional reporting requirement -- status of transfers reported monthly to the County Superintendent.


Restrictions on Transfers: What it means to SOMSD:• Curtails flexibility and restricts the ability to manage

adjustments as the year progresses.• Requires pin-point budgeting 6-15 months in advance.• Adversely impacts use of the budget as a rational planning and

management document. Budget is based upon projections and assumptions regarding enrollment, staffing levels, fixed cost increases, student needs, building repairs and other item costs that can fluctuate dramatically.

• Concerns that the County/State administrative staffing may not be adequate for timely review and approval.

• Further loss of local control.


SUMMARY: IMPACT OF S1701

• Programs and services have already been reduced to contain budget increases in previous budget.

• Pressures district to make drastic reductions in programs and services.

• Does not take into account the additional responsibilities – and costs -- to serve a diverse population and maintain integrated schools.

• Likely to affect the wage rates we are able to pay and/or the class size we are able to sustain.

• Loss of local control; final decision-making with state administrators.


SUMMARY: IMPACT OF S1701• Makes school spending the scapegoat for high

property taxes when the real issue is New Jersey’s over-reliance on the property tax to fund schools.

• Schools have not received increased state aid for more than 5 years.

• Implies that the solution to high property taxes is reduced school spending when the real answer is the need for full funding for all state and federal mandates imposed on schools.

Three-Year Budget Projections: 2007-08, 2008-09, 2009-10

November 20, 2006


Projection Caveats

• The following are projections. They are not predictions nor forecasts; The outcomes only hold true as long as the assumptions remain true.

• Key cost assumptions are based on the best available information and will change as more information becomes available.

• The projections for the upcoming 2007-08 budget do not constitute a budget proposal but merely illustrate a range of resource cuts that might be necessary in the face of external constraints.


Projections are a planning tool.

• What expenditure increases would be necessary to maintain the current level of programs and services?

• What would be the tax impact?

• What level of dollar cuts would likely be necessary from this “maintenance” level to comply with S1701?


Standard Modeling Approach Used.

• Determined “maintenance” budget required to continue current programs and service levels.

• Considered impact of various alternate resource costs and levels on expenditure totals using the key variable of salaries.

• Considered impact if expenditures were held to 4% CAP as likely will be required under S1701.

• Compared annual rate of expenditure increase.

• Compared estimated General Fund tax burden and annual rate of tax increase


Key Assumptions for Revenue

• Formula state aid is likely to remain constant - about $5 million for the general fund.

• S1701 requires appropriation of unreserved fund balance to reduce taxes. $1,250,623 has been reserved for that purpose.

• Miscellaneous revenues include interest earned on investments and rentals for use of facilities.

• Local taxes comprise the balance of budget revenues.


Key Assumptions on Revenue (Cont)

• Fund balance only reduces taxes, it is not available to increase spending.

• Restricted federal funding and state entitlements are not included in this discussion since they do not contribute to the general fund.

• Taxes for debt service are included in the tax impact projections to provide a total picture of taxes required.


Key Assumptions for Expenditures

• Inflation factor of 4% for most categories including supplies, materials, texts.

• Key cost drivers inflating at a more rapid rate:– Health benefits, +15%– Out-of-district tuition, +15%– Legal costs/judgments, +10%– General insurance, +15%– Utilities, +20%


Salaries and Benefits Comprising Nearly 80% of the Budget Are Key Variable.

• SOMEA contract expired 6/30/2005. • Cost of increment at current staffing levels /

guides:2006-07 2.60%2007-08 2.75%

2008-09 2.46%

• Projected impact of settlement: 4.44%


Salaries and Benefits Comprising Nearly 80% of the Budget Are Key Variable.

• ASCA contract expires June 30, 2007.

• Projected rate of increase 2007-08 3% (assumed)

2008-09 3% (assumed)

2009-10 3% (assumed)

• Central Office salaries are negotiated annually. Projected to follow ASCA increases of 3.0% in each of the three years.


Additional Cautions and Caveats.

• Some cost assumptions may not hold true; actual budget expenditures needed for the various levels of resourcing might be higher than illustrated.

• Existing level of state aid is, as always, at risk.

• Projected cost of building maintenance may increase pending capital projects.


Maintain current programs and services(budget amounts in millions)

General Fund 2007-08 2008-09 2009-10

“Maintenance” budget $94.8 $101.4 $108.9

Expenditure increase rate 7.73% 6.97% 7.44%

Taxes ($) $91.2 $94.9 $98.7

Taxes (%) increase 7.02% 8.60% 7.60%


Spending held to 4% CAP (budget amounts in millions)

General Fund 2007-08 2008-09 2009-10

Expenditures held to CAP $91.2 $94.9 $98.7

Expenditure reduction from “maintenance” budget

($3.5) ($6.5) ($10.2)

Expenditure increase rate 3.71% 4.02% 4.02%

Taxes (%) increase 2.87% 5.60% 4.12%


Review of Prior Year Cuts:

Budget YearReduction from “Maintenance”

Positions Eliminated

as a Result

2000-01 $1,527,833 5.6 FTEs

2001-02 $1,502,414 8 FTEs

2002-03 $2,956,882 18 FTEs

2003-04 $2,564,617 16 FTEs

2004-05 $2,389,765 24 FTEs

2005-06 $3,150,204 34.7 FTEs

2006-07 $3,213,638 97 FTEs


Baseline Data for Building the Budget

• District Goals, Budget Priorities

• 2006 CAFR (audit) including MD&A (management report) presented Dec 4 by auditor

• General Fund free balance status report as of June 30

• Enrollment projections by professional demographer

• Low income students report

• Transported students report (DRTRS)

• Average employee salaries including benefits• Required maintenance schedule


Summary

• Again, we face a major challenge in balancing the need to limit the district’s spending against the need to maintain a viable offering of programs and services.

• Operational efficiencies and program realignments continue to be sought although many have already been addressed in previous budgets.

• Spending constraints required by S1701and proposed legislation will likely require repeated cuts in resource levels, principally staff and administration FTEs.

• Budget Priorities will guide the budget development process.


Next Steps in Budget Development

• These projections are intended to assist decision-makers in understanding the impact of S1701 on various budget decisions.

• Actual budget expenditures will be further developed considering multiple inputs including:– Building on baseline data– Continued cost analysis– Input from stakeholders on actual needs of district

• The Preliminary Budget will be presented to the BOE by the Superintendent on January 22.

south orange – maplewood school district 2007-08 budget development november 20, 2006

Documents

school budget

allowable budget increase

current budget

budget management

budget accounts2007

budget developmentillustration

budget development2007

budget developmentnovember