The District's Revenue Mistake: What It Means, What To Do Now

Several weeks ago PAUSD announced that property tax revenues for the 2016-17 school year will be $5.2 million less than estimated in the budget the school adopted in June. The incorrect estimate is largely the result of an oversight by district staff in failing to take into account a large exemption for the new Stanford Hospital construction when projecting property tax revenues.

The biggest risk is to our high school students, who will see sharply increased class sizes unless we act to cut non-educational spending in order to protect our ability to hire needed new teachers at Paly and Gunn. That’s because high school enrollment will increase by around 600 students (around 15%) over the next several years, which means that the district needs to hire 20-25 teachers simply to keep class sizes from rising.

A 15% increase in students with no increase in teachers would mean classes with 30 students might become classes of 35, while teachers with 125 students might now have 145. Those course sizes and teaching loads would make it harder for students to receive individual attention from their teachers and for teachers to provide individual and timely feedback to our students.

The Size of the Problem

A $5.2 million estimation error is a significant amount of money, even in a $230 million budget — the equivalent of over 40 full-time teachers. But this year’s shortfall has a ripple effect into future years, since it represents a permanent reduction in expected revenues as future years will build off a smaller base. In addition, district staff’s projected property tax increase for 2017-18 needs to be trimmed from 7.83% to a more likely 5% - 5.5%, given this year’s actual increase of 5.34%. That reduces next year’s expected increase from $11.75 million to around $8 million. Taken together, that means that our revenue projections for next year and subsequent years need to be lowered by approximately $9 million.

For the first two years the impact on the overall budget of these mistakes in calculating revenue will be reduced by $1.5 million each year, as the district will be able to cancel planned 1% bonuses to teachers and other employees under the recently agreed contracts. In addition, the district will reopen negotiations on the 3% raise in the contract for 2017-18, with the goal of reducing the size of that raise.

In retrospect, the 9% raise — 5% for 2015-16, and another 4% for 2016-17 — that the board agreed to in May, and that kicked in on July 1, looks even more unwise than it did at the time. As you know, I voted against that agreement and proposed instead a 6% raise. A 6% raise would have left $4.5 million available for other needs, including hiring the new teachers we need and responding to less-than-expected revenue. But we don’t have the option to revisit that decision, and have to address squarely our current situation to protect students from the consequences.

Long-term Impacts

When I learned about the gap between actual and predicted revenue, I asked staff to revise the budget projections through 2021 so that we could understand the long-term implications. I hoped that staff would provide those projections at the recent special board meeting on July 23. They unfortunately didn’t, so I revised the projections myself. The revised projections demonstrate that the district faces the likelihood of a large long-term budget gap — in other words, a structural budget deficit — unless the board cuts expenses.

A simple, but probably overly optimistic projection produces a cumulative gap between revenue and expenses over the next five years of $10 million. It uses the new revenue estimates, eliminates the agreed-upon 3% raise in 2017-18, and provides for no raises in the next four years after that. It also assumes steady property tax increases in the 5% - 5.5% range.

A slightly more realistic projection — adding just a single 2% raise in 2018-19 — yields cumulative budget deficits of $20 million. A mild recession that reduces property tax revenue increases to 3% in 2017-18 and 2018-19 would yield cumulative deficits of $40 million — this time with no raises whatsoever.

Conversely, achieving a balanced budget over the next 5 years with just a single 2% raise in 2018-19 would require 7% increases in property taxes in both 2017-18 and 2018-19, with steady increases over 5% thereafter. That rosy scenario isn’t impossible, but we would be foolish to bet on it actually happening.

The Response Must Prioritize Students and Teachers

There are only two possible responses to a budget gap: cut spending, or spend money from the district’s reserves to cover the excess spending.

Under board policy, the district maintains reserves of 10% of the operating budget. District staff’s initial proposal was to spend $919,000 from the reserves in order to cover part of the shortfall, with other one-time measures to cover most of the rest, including $1.2 million in undesignated funds that would otherwise go to the reserves. The only ongoing spending cut that staff proposed is to not hire additional teachers who were authorized by the board last month, in order to save of $375,000.

Reserves are intended as a ‘rainy day fund’, to protect against cuts to the educational mission in a downturn. It’s not appropriate to spend reserves now, when economic times are good and property tax revenues are strong. Spending reserves now will leave us in a weakened position when an actual downturn comes, and I will not support it unless and until every alternative has been fully implemented. It’s particularly unwise to use reserves to try close a long-term structural deficit, when the underlying problem is spending in excess of revenues.

Instead, we need to look for cost savings that don’t impact students in order to get the district’s expenses in line with its revenues. At the July 27 board meeting I proposed rescinding the 4% “me-too” raise granted to administrators by the board in May, which would yield nearly $500,000 in annual savings. I also asked Superintendent McGee to prepare a comprehensive list of options for cutting spending in non-educational areas, including non-essential administrative positions. While these cuts will be painful, it isn’t responsible to increase class sizes for our students to protect administrative raises and staffing that don’t directly support student learning. This is also an opportunity to look for opportunities for more efficient use of district resources.

Failing to cut expenses early enough and substantially enough will likely result in increasing class sizes as a non-decision: the district simply won’t have enough money to hire the additional teachers needed to prevent class sizes at Gunn and Paly from increasing as enrollment increases. I’ll be working over the next several months to ensure that the district takes a sensible and prudent approach to this problem. Please feel free to contact me if you would like to discuss this further or would like (even more!) detail.

Some Thoughts on the School Board Election

There are three seats on the PAUSD school board up for election in November. As you consider candidates, I hope that you will look for a demonstrated commitment to sound budgeting and thorough analysis. I’ve made one endorsement so far in the race. Todd Collins, a longtime member of the district’s bond oversight committee and a member of the enrollment management committee earlier this year, has the skills and perspective that we need on the board to navigate the hard decisions ahead of us. I hope you’ll consider voting for Todd in November. I will have more to say about the election as the roster of candidates becomes clear after the filing deadline in a few weeks.

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