This is my second of three installments talking about the budget, and what I have observed from the TSD Board and Administration. My first installment in this series is available here.
The TSD Board approved the 2019/20 budget at the August 22, 2019 meeting. The budget represents a change of course in some regards, which is a breath of fresh air. I reference the budget workshop that occurred on August 8th, which provides quite a bit of specific information and can be viewed here. Well worth the time if you are interested.
CONSERVATIVE ENROLLMENT NUMBERS
TSD experienced a pretty consistent upward growth in enrollment(roughly 3% per year) between from 2014 to 2017, with a large decrease(about 5%) in 2018. The disconnect between TSD and TEA about enrollment was the primary cause of the ongoing labor dispute in 2018. In an effort to justify their financial positions, TEA said enrollment would be high, and TSD said it would be low. Neither of them worked off of actual enrollment. That has changed this year.
TSD is projecting enrollment at 6495 students, very similar to last year—which makes the most sense. (See enrollment chart at 10:24 of the workshop video for historical enrollment). This number is about 300 less than the 2017/18 and about 300 more than 2014/15. Most important, the projection represents the actual number of students enrolled in the most recent count.
TSD is down about 300 students from 2017/18, which is an anomaly given the fact that enrollment consistently increased in the previous decade. In any event, basing a budget on actual students attending school seems like the best policy.
THE 2018/19 BUDGET PROJECTS USING $1.8MM IN SAVINGS TO BRIDGE THE PROJECTED DEFICIT.
TSD is essentially a non-profit business. Think of it the same way you do your household budget. The total income and expenses are each roughly $85-90 MM(million) per year. Hopefully the income is a little more than the expenses and some money can be tucked away in savings. So, when the income is more than expenses(see 2014-17), TSD puts money into savings. When the expenses are more than the income(see 2018-19), TSD dips into the savings account.
TSD had a surplus of $1.27MM in 2017/18, and saved about $1MM per year on a consistent basis between 2014 and 2017, which resulted in a significant increase(about $5MM) in the fund balance(savings account).
However, last year was a different story. TSD spent about $1.3MM(million) more than it took in during 2018/19. The approved budget for upcoming year projects that TSD will spend about $1.8MM more than it will take in during 2018/19. So, the fund balance has decreased $1.3MM this year, and is projected to decrease another $1.8MM in next. Obviously, that is not sustainable. (The TSD chart showing this is at 34:40 of the workshop video).
The take home point is that the ending fund balance has gone from:
The fact that TSD is approving a budget that projects a “loss” of $1.8MM is concerning. That being said, getting the budget to balance in 2018/19 would have required some pretty drastic cuts (likely significant staff reductions) and that is a step TSD was not willing to take. Instead, TSD is banking on the figuring out a way to right the ship over the next 12 months and get to a balanced budget.
Candidly, TSD does not have any alternative. Like almost every public agency, TSD maintains a reserve account that is essentially untouchable absent extraordinary circumstances. TSD is projecting that reserve account will dip to $6MM by the end of the 2019/20 school year. I believe most financial auditors and analysts would take the position that such a small reserve is not ideal, and possibly ill advised. For reference, TSD maintained a reserve account of at least $10MM over most of the last 5 or 6 years.
The bottom line is that TSD has left itself with a pretty narrow margin for error, or unexpected negative financial events. TSD must hope things go smoothly this year, and then find a way to bridge the $1.8MM projected deficit. There is no way TSD can go into the 2020/21 budget with any projected deficit.
TSD MOVING TO A TRUE BUDGET
TSD has traditionally built about $3MM to $5MM of budgeted expenses(“capacity”) that it never realized. Such a practice seems fiscally less than forthright to me. I am not implying it was(or was not) intentionally deceptive, and there is an argument to be made that doing so makes sense. Those arguments are not persuasive to me though.
Think of capacity as an optimistic hope you will see a windfall of income, and therefore be able to spend more. Most of TSD’s income is relatively predictable, as are its expenses. If TSD knows it will get $85MM in income, it can budget $85MM in expenses. However, it is possible TSD might get unexpected income during the budget year. Maybe a grant comes through, maybe enrollment is higher than expected, etc. TSD’s practice has been to budget in expenses just in case that unexpected money arrives. If the money does not come in, then the expenses are also unrealized.
In simple household budgeting terms. Think about sitting down at the beginning of the year and planning to take a $5000 vacation, so you provide for that expense in your budget. However, you know that you are only going to take that vacation if you get a raise from your employer. You work hard all year, and the raise never comes, so you end up not taking the trip. The $5000 expense, although budgeted at the beginning of the year, was never incurred. So, when you take the $5,000 out of your budget, and “scrub” that expense—knowing you will never take the vacation, you are not actually incurring a loss or reduction(other than your downtrodden spirits).
Built in capacity caused problems during the negotiations as TSD and TEA battled about whether that income would be received, or the expenses would be realized—each cherry picking the numbers to their advantage. Here is a blog I did on the disconnect last fall.
Notably, Jim Brittain inherited the prior budget, and appears to not favor building in much capacity. In fact, Jim went through the budget and “scrubbed” about $5MM in expenses, which resulted in no true reduction as the expenses were never realized. I did a blog on the scrub which can be found here.
Jim Brittain and Sean Dotson appear to be on the same page with respect to a true budget moving forward. TSD specifically stated that it now is going to approve a “true budget,” which, with a few limited exceptions, factors in only actual expenses and income. This is a little different than the past budgets, which built in potential income and expenses(up to $5MM). This is a great move as the prior budgets were unrealistic to a significant degree, and the result was TSD and TEA engaging in discord about projections(educated guesses) about unknowns.
The TSD Board is much more engaged with budget issues over the past few months. This has resulted in more informed dialogue and discussion, and the ability to gain a clearer understanding of where the Board members stand. Also, it appears to me that Superintendent Dotson and Jim Brittain, have changed course in some regards. While I take issue with some of the decisions(some of which will be discussed in the third part of this series), I am of the opinion the change in course has resulted in more transparency, better discussion, and a more informed community.
As always, we welcome your feedback.