South Orange Maplewood School District

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South Orange Maplewood School District

• 2007-08 Budget Development
• November 20, 2006

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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

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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

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The Rules Changed S1701

• Limit on CAP
• Change in use of CAP adjustments
• Restrictions on use of Separate Proposal(s)
• Limits on administrative costs
• Limits on allowable free balance
• Restrictions on use of free balance
• Restrictions on transfers within budget accounts

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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

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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.

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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.

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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 1,940,608
• Health benefits 8,800,000
• Assume 15 increase 1,320,000
• (industry trends range 12 -19)
• 3,260,608
• Allowable budget increase at 4 CAP 3,237,055
• Shortfall in allowable revenue ( CAP)
  23,553
• (before addressing increases of other cost
  drivers such as fuel and insurance)

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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

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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.

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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.

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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 years 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
  districts administrative costs are too high in
  his/her opinion.

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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-TE 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.

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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.

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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
  Superintendents Office, community relations,
  state/federal relations.
• District-wide costs for telephone,
  communications, postage, legal ads, liability and
  fidelity insurance.

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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.

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Administrative costs (cont.)

• 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.

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Administrative costs (cont.)

• 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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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SUMMARY IMPACT OF S1701

• Makes school spending the scapegoat for high
  property taxes when the real issue is New
  Jerseys 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.

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

• November 20, 2006

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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.

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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?

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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

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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.

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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.

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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

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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

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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.

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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.

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Maintain current programs and services(budget
amounts in millions)
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Spending held to 4 CAP (budget amounts in
millions)
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Review of Prior Year Cuts
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Baseline Data for Building the Budget

• District Goals, Budget Priorities
• 2006 CAFR (audit) including MDA (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

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Summary

• Again, we face a major challenge in balancing the
  need to limit the districts 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.

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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.