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Once in a while you’re better off being wrong, than right. Say you’re walking along the edge of a cliff with some friends, and you keep saying, “You know, I don’t think this feels safe.” Suddenly you hear a big crack, like a thousand rifles firing at the same time. You find yourself out in the middle of space, hurling downward with a bunch of boulders ready to punctuate the certainness of your demise. Would it really give you a warm feeling inside to shout, “I told you so?”

This is exactly the way I feel right now, in regard to the public school district’s looming $3.3 million dollar deficit. I tried, as much as the election forums run by this town’s media allowed, to raise some red (definitely RED) flags about the district’s budget problems last fall, but fiscal reality was not a popular subject. School board candidates went on chattering about how they were going to reduce class sizes, beef up the music program, reinstate seven periods in the middle and high schools, on and on. The paper of record touted these fantasies as the proper “positive” attitude.

In actuality, if anything, there were likely to be more CUTS in programming.

Is an Intervention Necessary?

Like most problems involving human frailty and error, the problem afflicting ISD 709 has two layers. There’s the underlying problem itself, and then there’s the overlaying denial that any problem exists.

When I was out on the campaign trail, I ran into one of the State legislators. Because our conversation was off-the-record, I won’t divulge his name, but it was a “he,” and anyone following this part of local government won’t have trouble guessing. He’s the only non-school-district leader in this town who has demonstrated concern about ISD 709, and especially about a concern of mine: Denfeld High. During our conversation, he expressed interest in trying to secure some money out of the bonding package, but he told me the State wouldn’t just throw money at the problem. He said, “You have to have a plan. We’ve had a number of meetings, but it’s ISD 709 that’s been reluctant to admit there’s a problem.”

This decade-long reluctance to admit there’s a problem is a big problem. If Duluth is not careful, this problem is going to become a problem for all of us.

For ten years, Duluth citizens have been traipsing along the edge of the cliff, following leaders who keep insisting on whistling a happy tune. During one of the candidate screenings last fall, I was asked, “What would you do for the public schools if money didn’t matter and you could do anything you want?” I admittedly was not born to be a politician. What I should have said is: “I’m not just talking here!! I think we really can do this! I think we can hire back all the teachers we lost during the Red Plan and double their pay, because they deserve it! I think we can get class sizes down so low people will start offering to pay to go to the public schools!” Instead, I said, “Look–I just can’t go there. I’ll tell you what I will do: I’ll search for every penny I can find and make sure it goes into making the Duluth public schools better.”

I didn’t get any endorsements.
The problem with not dealing with the real facts is that you cannot come up with a real solution. And if you don’t come up with a real solution--either steer off the path you’ve been traveling on, or figure out some way to make it more secure, then all you’re counting on is luck to keep you from eventually doing a header off the cliff.

The Problem.

I know everyone likes to point fingers at politicians (I, myself, have engaged in this national pastime with as much relish as anyone), but most citizens have four more fingers pointing back at themselves. As I expressed it in the memoir I’m writing about the Red War:

“The surest way to elicit yawns from a Duluth citizen is to start talking about school district numbers. That citizen’s eyes will glaze over within seconds. Keep talking and he or she will fall right over, snoring loudly. Ultimately, however, government is about numbers. Numbers are like steel girders in the support structure of a bridge. If the numbers aren’t sound, sooner or later you’re going for a swim. School district finance is a low-lying swamp of fecund pools dotted with islands of moldering-smelling money connected by weirdly (and often hastily) constructed bridges…

Several of the structures assembled by ISD 709’s Finance Department are sagging, bending and creaking. The city of Duluth is going to have to pay dearly for many years to shore up these teetering constructs, but very few people have a clue. Throw a half billion dollar capital project on top of the complicated and arcane matrix of school district finance and you’ve immediately lost 99.999999999999999999% of society. Under this cloak of confusion, glossily painted as a wonderful “once-in-a-generation opportunity” investment for our children’s future, corporate marauders are free to fiscally pillage…”

I know I’m mixing metaphors, but just visualize the bridge extending out from the edge of a cliff, and you’ll get my drift. Citizens should pay more attention to where their leaders are leading them and that means occasionally trying to grasp those squiggly little marks called numbers.

Only a handful of people–at best–in all of Duluth are even aware most of the Red Plan was not financed with General Obligation bonds. The bulk of the plan was financed with a much more slippery financing vehicle called Certificates of Participation, or C.O.P.s. It’s essentially a leasing arrangement. There are two different types: lease/purchase and lease/levy.

I’m tempted to delve into these numbers, but I know most citizens would roll up the Reader and use it for a pillow. I’ll just point out that the lease/purchase Red Plan bond payments are appropriated annually (automatically withdrawn) from the district’s general operating fund, and the total amount for these three bonds is currently $3.4 million.

The Problem’s Spin.

If district officials ever do reference their fiscal problem, they downplay it with a flowery narrative absolving themselves from any culpability. Superintendent Gronseth again expressed the district’s spin this way, to the gullible paper of record: “Expenses have finally caught up with us, and we knew they would, because our increases haven’t kept up with the percentage increase of expenses.” In other words, he was again blaming all the district’s fiscal problems on insufficient State funding. Not long ago, in the boardroom, Mr. Gronseth declared: “State funding has been flat, or nearly flat, for twenty years.”

In 1998, the State’s Basic Education Formula rose $76; the next year it rose $79; the next year $167; the next $159; the next $104. In ‘06, it rose $182. The next year it rose $191; the next $100. In ‘12 it rose $50, in ‘13 another $50, in ‘14 it rose $80. In ‘15 (with a change in per/pupil weighting), it rose $529. This year, it rose $117. Next year’s projection is $119. Each $100 rise in the formula represents nearly a million dollar average annual revenue increase for ISD 709 over the past two decades.

The State of Minnesota’s investment in public education is in fact enormous. This year, the State paid out $6.95 billion of general education revenue to public school districts.

District officials like to paint their organization as a poor undernourished beggar, but big bucks have been flowing into the public schools’ coffers over the past few years. On top of aid increases, the State has paid back all of its borrowed money and now covers all-day kindergarten, freeing up another big hunk of cash. The State is also helping out the district’s budget with a $1.1 million dollar a year matching grant. And don’t forget all the contributions from the taxpaying serfs of Duluth: the local levy has jumped nearly twenty million dollars since the start of the Red Plan.

Back to the Problem.

So why is district 709 deep in the red again? As I’ve written before in this column, there are three big holes in the budget. The first is the $3.4 million being appropriated out of the General Fund to pay Red Plan bonds. The “designated account” set up within the General Fund to pay these bonds is largely an empty pantry. The two principle revenue streams the payments were to be drawn from were Red Plan “savings” and the sales of “excess property.” The State Auditor’s Office called the Red Plan savings projections “skewed,” and no one has to be told property sales are a bust.

Some Board members are grumbling that some of this debt payment needs to be moved to the tax base. Normally (as unfair to Duluth citizens as it would be), they might be able to do that. Minnesota State Statute 465.71 in fact requires a cancellation clause, which (according to the district’s bond council) “specifically requires that the applicable governmental unit must have the right to terminate the lease/purchase agreement at the end of any fiscal year during its term.”

This clause is meant to protect government organizations from getting themselves into a financial bind where they are appropriating too much money and killing their budgets, but in the same document the district’s council states: “The proposed (Red Plan) Installment Purchase Contract will not contain an annual cancellation clause as is required by M.S. 465.71.”

There is a lot of legal jargon explaining why the Red Plan’s financial scheme is exempt from the requirement, but the bottom line appears to be that payments for the lease/purchase bonds must continue coming out of the district’s General Fund, even if those payments are hurting the budget. It is also worth noting that the Minnesota Dept. of Education’s Program Finance Director determined the lease/purchase bonds were not eligible for a State guarantee program, which would grant some relief and/or additional levying authority.

Moody’s Investment Service saw the whole financial arrangement as a borderline acceptable risk, and downgraded the bond rating of the lease/purchase bonds to Baa3, one level above junk bond status, due to “risk of non-appropriation.”

This is Moody’s assessment of ISD 709’s financial climate: “The outlook on Duluth ISD 709 is negative, representing our belief that the district’s already depleted reserves and liquidity may continue to deteriorate.” The list of “challenges” contributing to the negative outlook were: “(1) Declining enrollment trends over the past couple of decades factoring unfavorably in state funding formula. (2) Depletion of General Fund reserves due to consecutive years of operating deficits. (3) Reliance on one-time revenues for operations and debt service. (4) High debt burden due to extensive capital improvements per long-range Master Facilities Plan, with weak amortization structure. (5) Substantial reliance on cash flow borrowing to fund operations.”

Problem? What problem?

Let’s start with the declining enrollment trends. I don’t know how to state this clearly enough to puncture through the mass denial in Duluth, but the Red Plan is a FAILURE. The plan was supposed to be an enrollment magnet, with big, shiny 21st century schools. Instead, people have been running from the mess ever since Keith Dixon came to town. ISD 709 has lost students every year, 23% of the enrollment, more than 2500 students.

If you point this out to the Board majority or Administration they will deny the problem. They will tell you that Duluth is an aging, shrinking city. None of the data backs up that assertion. The primary reason ISD 709 is losing students is because the Red Plan is a poorly marketable FAILURE than drained resources from real education. . The plan’s reverse effect of losing rather than luring students has resulted in several million dollars in lost State aid. The State Auditor also found the district was using operational money to “offset the deficit in the designated account”–the fund that bond payments for the Red Plan are being appropriated from.

Finally, one district expenditure in particular has been a major contributor to the problem. A Board Negotiating Committee needs to be reinstated for contract talks. The idea of the Board as a whole “setting the parameters” and Administration doing the negotiating hasn’t been working well. The district has repeatedly given pay hikes out of proportion to the realities of its budget. Does it really make sense to give out a three million dollar raise when you’re looking at a three million dollar deficit?

District CFO Bill Hanson was warning of another looming deficit as far back as the Jan/14 Business Committee meeting. Even if you buy Superintendent Gronseth’s claim that the problem is all due to State revenues not keeping up with expenses, his statement that “expenses have finally caught up with us, and we knew they would…” begs the question: if administrators knew a budget shortfall was coming, why didn’t they adjust? Why in the world did they jump the payroll? This part of the fiscal problem boils down to Finance 101, a no-brainer: subtract a three million dollar raise and you likely erase a three million dollar deficit.

Because the district is looking at another deficit, no headway at all will be made on class size in the coming year, the biggest reason for the district’s inability to compete in the marketplace.

The district’s once-massive $30 million reserve fund has deteriorated about as far as it can deteriorate, so the Board can’t keep raiding the cookie jar to fund operations, and the Red Plan’s boosters have developed selective memory when it comes to overblown Red Plan promises. Former Board Chair Judy Seliga-Punkyo once declared (The Budgeteer, 8/23/09) that the plan, including her big, ritzy pools “saves $5.3 million per year. Once all the construction is completed in 2012, the Red Plan proposes to use $3.8 million to pay off construction bonds and $1.5 million a year for the operating budget, which can be used to fund teachers and educational programs.”

Where’s the extra $1.5 million that’s supposed to be pouring into more teachers (to reduce class size) and other classroom needs? That glossy promise vanished like a mirage in the hot desert sun.

Much of the Red Plan’s financing scheme was about as valid as a telemarketing scam, and now we have a problem on our hands. We have a major competitor–a new Edison high school--coming into the marketplace in a year and a half. Keep denying that problem, and we’d all better start practicing hand-gliding off of cliffs.