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During a Committee of the Whole school board meeting, held in the last week of March, we launched off on the first leg of ISD 709’s annual budget journey.  The district’s new Chief Financial Officer, Kathy Erickson, promised our trip would progress on schedule and the Board would actually have a budget by the end of the fiscal year in this round.  Administration will have a “preliminary budget for our April Business Committee meeting.  I stress ‘preliminary,’” she added, “because we’ll continue to work--delve into the information, and have a (final) budget prepared for you for our June meeting.”  

So off we went on ISD 709’s annual fiscal journey, sort of like pushing a canoe out into a big water that everyone knows will soon narrow into some pretty tricky rapids.  

C.O.W. meeting, 3/26/19

CFO Erickson--getting everyone used to the water--took the Board through a power point presentation, beginning with “Budget Goals.”  She told our representatives that she believes “in a holistic approach to budgeting,” which she defined this way: “We have one district budget.  We have a budget that we need to balance.  Inside of that (budget) there are many layers.  There are many departments.  There are requirements and reserve funds and things that have a lot of detail behind it, but this is a budget that we need to work together on.”

Everyone pick up a paddle and let’s start moving in the same direction.  
“This is not a new process.  This is not new information.  This is just looking at it maybe from a different lens, or pulling different things into a different slide in a power point.  So, there isn’t anything reinventing the wheel.  It’s just saying, ‘Here’s how we’re pulling this together, and what does this information look like.’”

CFO Erickson is a nice woman with an upbeat attitude.  Because of a big influx of new tax money, the seat she’s sitting on isn’t quite as hot as the one her predecessor, Doug Hasler, occupied, but I still wouldn’t advise her to wear any sweaters on this whitewater experience.  
I admit to being jaded, after watching a couple of CFOs and Finance Managers get mangled on rocks in a wild river over the course of a decade, but of course Ms. Erickson deserves a chance.  Given her built-in advantage--a lot more money to work with--maybe she will be able to spin this whole mess like a kaleidoscope and in a few months we’ll all view it through a new, much prettier lens.     

      
Enrollment

CFO Erickson flashed a graph on the screen in the darkened boardroom and told the Board she and her administrative team had been “looking at and identifying enrollment projections.”
Enrollment numbers baffle a lot of people, including Board members.  Just to give readers a sense of the bureaucracy that has built up around school districts over the past few decades, this is the State’s explanation of the most current method for calculating student numbers for aid: 
“The count of pupils used for most school funding formulas through fiscal year 2014 was replaced by ‘adjusted pupil units’ for fiscal year 2015 and later.  The count is adjusted (meaning students actually served by the district), marginal (the greater of the current year’s count, or 77 percent of current year’s count and 23 percent of the previous year’s count), and weighted by grade level (pupil units).  Beginning in fiscal year 2015, adjusted pupil units, or adjusted weighted average daily membership, is the primary pupil count used in school-funding formulas.  The count is weighted by grade level (.55 for half-day kindergarten, 1.0 for full-day kindergarten and elementary grades, and 1.2 for secondary grades) and “adjusted” to reflect students served.  Marginal costs pupils are removed from this count.” 

I’m sure everyone else, just like me, after reading this explanation, will have no further questions!  
CFO Erickson filled the Board in with some additional information this evening: “When a student is enrolled for the first day of school, to the last day of school, that’s a one ADM (one pupil unit counted in the Average Daily Membership.)  Attendance and membership are two different things.  A student can be absent, and still be enrolled, and still count for us.  But, if we have students that are absent 15 days in a row, an (ADM) record will drop off and we’ll have to restart again.  So, absenteeism only matters if there’s a string of at least 15 days…If a student is sick every other day, (he or she) would still be a full ADM for us.”

All this pupil counting is important because the district’s revenue stream is primarily based on the number of students it serves.  The biggest difference between Duluth’s municipality and the school district is that the municipality, except for residential energy use, doesn’t have to worry about other entities vying for its customer base.  This number may have grown larger by now, but in 2016 the Duluth News Tribune reported that there were “43 other educational entities” besides ISD 709 operating in the Duluth area, competing for the public school district’s customers: students. 
“The majority of our school district budget is based on enrollment trends,” CFO Erickson told the school board, “many of our funding formulas are based on pupil counts.”  She added that she and her team needed to feel “comfortable and confident with the enrollment projections” they were “bringing forward.”  She said they were looking at both “the funding side, and the expense side” in relation to enrollment numbers.  

“So,”  she continued, “those enrollment projections are critical pieces, and we have been looking at and analyzing those for months.  Again, this is for fiscal year ‘20, which starts in September, and we don’t have that information (solidly set) yet.  These are estimates.”
Just for the record: fiscal year ‘20 starts July 1st, and the school year starts in September.
The CFO told our Board she and the Finance Manager had been “very cautious about putting information out too early.  We have spent countless hours looking at trends and projections, but, oftentimes, because of volatility and opportunities that students have to move around within our district, and within other districts, knowing those numbers and knowing those trends can be a challenge.”   

     
 More perspective on trends

 ISD 709 is projecting another “slight decline in enrollment” next year.  Next year’s projection, at the moment, is 8116.
Enrollment was 10,772 in fiscal year ‘05, the year before the serial consolidator from Faribault, MN, came to town.  The 8116 figure projected for next year represents a 25% loss over the past 15 years.  Using the current general education formula for State aid (soon to rise at least 2% higher, in this legislative session) that translates to nearly $17 million ($16,764,672) lost annually.   

Fewer students also reduces expenses, so the revenue/expense tradeoff isn’t one-for-one, but many building expenses, debt payments and other costs remain constant whether enrollment is 6000 or 10,000.  Loss of student enrollment is definitely a big loss in net revenue.  
Another important factor in calculating loss is the destructive paradox created by a large capital investment.  While enrollment plummeted, largely due to the investment’s disruption and failed promises, class size simultaneously spiked, decreasing ISD 709’s educational marketplace competitiveness even more, despite fancy new buildings.

During the 5/8/17 school board Business Committee meeting, Mr. Gronseth made a very trenchant remark in regard to Lincoln Park Middle School, which has an in-use capacity of 1089 students, but had an actual enrollment of 668: “Lincoln Park, as you can see, has about 300 students less than Ordean East (Middle School) does, and at this rate, Congdon Elementary (with a capacity of 600, and an actual enrollment of 613,) could end up larger than Lincoln Park, if the pattern keeps going the way it is.”   

A copper-sided palace with an eight-lane swimming pool and a price tag of $50 million only 60% full is not a sustainable formula for fiscal success.  ISD 709 has to whip this failure into something competitive and start drawing more students into its big expensive schools, or it will continue to have money woes.   

Priorities

Erickson listed the district’s Budget Priorities as

(1) Fiscal stability and reserve fund balance growth,

(2) Alignment with district goals and strategies,

(3) Utilize revenues effectively,

(4) Program-based budget layers and

(5) New referendum implementation.  

I only have the time and space to drill down into the first one: the reserve fund balance and its related goal of fiscal stability.
“When I first got here (to the wondrous world of ISD 709,)”  CFO Erickson began, “we had a discussion about our fund balance and the Board moved forward on a fund balance policy, to ‘strive’ for 8% of our general fund yearly expenditures.”
To give readers some perspective on how far ISD 709 is from the 8% goal in its new watered-down policy (which used to unequivocally state the district “must” maintain a 10% reserve,) the current fiscal year’s general fund expenditures are over a hundred million dollars ($108,364,256.)  8% of that figure would be well over $8 million ($8,669,140.)  The official fund balance for this year won’t be known until the annual audit report is released in December, but the balance at the end of last year was less than half a million ($399,166,) or less than one half (.37) of 1%. 

In 2017, administration calculated two days of staff payroll expense as $640,000.  When the serial consolidator came to town, at the end of fiscal year ‘05, district 709 had a $18,120,370 unassigned reserve fund balance, or enough to cover current payroll expenses for about two months.  Seven years after the cotton-topped hustler slipped out on the mess he’d created, the unassigned reserve fund had dropped so low our rainy day nest egg wasn’t enough to cover payroll expenses for two days.   

CFO Erickson told the Board that a “general estimate” for an 8% reserve fund balance “would be eight million dollars for us, because we’re a ‘little bit’ over $100 million in our general fund, as an average.  We’re actually up over that $100 million now,” she told our rapt school board representatives, “but on average we would be looking for having eight million dollars in our fund balance.”  

Just a heads up, Duluth taxpayers: the primary place they will be ‘looking’ is your wallets.  A 26% tax hike last year will make very little headway in filling this huge fiscal hole in our school district. 
“Right now,” Erickson went on, “we have a little less than $400,000 (in the fund balance) as of June 30th, 2018.  So, to solve that (fiscal disaster) will take a multi-year approach (maybe even a century or two,) and we do need to identify the mid- and long-range impacts to the fund balance to make sure that if we are going to be striving (paddling as hard as we can) towards that goal for this district--and, again, knowing that maybe we cannot accomplish this in one year, or two years, or even five (and maybe fifty, or eternity,) we need to be thinking about: What does fiscal stability mean to us?”

I can report what fiscal stability was supposed to mean to us: nearly $4.5 million ($4,493,676.25) extra money available in ISD 709’s budget next year from all the efficiency savings of a massive consolidation project.  
Continuing her reflective rhetorical questions, CFO Erickson asked what making “fund balance growth” would look like as “a priority for our district?”  Then she delved into more bureaucratic lingo: “That is a component that we need to have some important conversations about, and decide: What component of our budget includes making sure that we’re considering our fund balance as part of our next year’s budget?”

Answer: the component that says, “We will put X amount of dollars into our fund balance.”  

Graphic graph

Erickson flashed another power point slide onto the screen and called it one of several “jazzy charts and graphs that I enjoy, that I may just look at on my own, sometimes.”  It was a graph of ISD 709’s assigned and unassigned reserve fund balances for the past eight years.  Personally, the only time I would “enjoy” looking at this graph would be as Exhibit A in a “Fiscal Melt-downs to Avoid” seminar.  In eight years, the fund balance fell from a positive $6 million, to a half million in the red, then rose a tiny bit back up--to just under a half million in the black. The district narrowly averted plummeting officially into statutory operating debt status at least twice--once by un-assigning a Severance Insurance Fund, listed in this graph as a “committed for separation” in 2013, and by cutting a million and a half dollars from operations in December of 2017.     

Erickson told the Board her job has been to “understand the story behind the numbers, and to understand the choices that the district has been making so we can lay a good foundation for choices as we move forward with the budgeting process.”  
She said the school board had to be prepared for “what-if scenarios,” and think about “what happens if this happens, if we have a building-need that happens.  When I first got here (to school-finance paradise,) some of the roof pieces were falling off the roof here, at this building (Old Central,) and so we had to make a repair…There are many, literally hundreds of things that can happen with the district, and we have to make sure in our budget we have those dollars set aside.”    

Buck up, school board!  Put your backs into your paddling and don’t over-worry about any unseen rapids up ahead.  

You just have to STRIVE to do better!