Five-year forecast indicates operating debt by 2017-18 for Pequot Lakes
The Pequot Lakes School Board got a glimpse at the future of the district's budget at its work session on Monday, July 21, and without changes, the future holds a whole lot of red ink.
A five-year budget forecast prepared by School Management Services, a Rochester-based business planning consultant firm specializing in schools, projects Pequot Lakes may be facing statutory operating debt (SOD) by the 2017-18 school year.
Board chair Kim Bolz-Andolshek described the forecast as "pretty alarming," but that the information it provided would help the board make more informed decisions about future budgets.
The forecast is based on several budgetary assumptions to ensure a realistic outlook, including changes in enrollment, changes in state and federal aid and costs associated with salaries, wages, benefits, services, and supplies.
Enrollment is assumed to increase by 2 percent in 2014-15 and 1 percent most years after that.
State aid is projected to increase by 1.5 percent annually, but federal grants are assumed to remain flat through the five years studied.
Spending on most services is projected to increase by 2 percent each year, with a 3 percent increase in spending on utilities. Spending on supplies is expected to vary, with a 1 percent increase in general and instructional supplies, a 3 percent increase in fuel expenses and 2 percent for all other supplies.
Notably, the baseline assumes a 2 percent increase in teacher salaries each year, including steps and lanes. Given that steps and lanes already represent an annual spending increase of approximately 1.8 percent, the forecast assumes a .2 percent raise. This is significantly lower than what the school board is currently offering the teachers' union in contract negotiations - 1.5 percent raise in the first year and 2 percent in the second - and much lower than what the union initially put on the table, 5.5 percent each year of the contract.
Spending on benefits is projected to increase by 2 percent as well, with the exception of health insurance, which is assumed to increase at a rate of 7 percent each year.
Todd Netzke, president of School Management Services, presented the figures to the board.
"The five-year plan is a fluid document," he said. "We'll continue to update it as we get new information."
The board is using this information to aid in its decision on whether to pursue additional levy funding for the district. Currently, the district receives funding through a voter-approved $1 per student levy, one of the lowest in the state, according to Superintendent Chris Lindholm.
In 2013, the Legislature authorized school boards to approve a levy of up to $300 per student without voter approval. This past session, local optional revenue (LOR) was extended to 132 districts previously left out of the funding loop, known as the "doughnut hole," including Pequot Lakes and neighboring Pine River-Backus. LOR makes an additional $424 per student available to these districts, which means Pequot Lakes could pursue a total of $724 per student for the next fiscal year.
"The reason we've gotten where we are without a levy is because we've continued to modify the budget," Bolz-Andolshek said. "This doesn't mean there's no hope. There's options out there, and the district has to decide how they want to be used."
Using baseline assumptions, which maintain the $1 per student levy, the district's SOD would be $1.1 million in 2017-18, $2.8 million in 2018-19 and $4.5 million by 2019-20. This means the unreserved fund balance, which school policy dictates should contain funds equal to at least 12 percent of the annual budget, would be in the negative by these amounts.
Netzke presented numerous funding scenarios and how they would affect the fund balance over five years. If the school board authorized the full $300 levy allowed without voter approval, there would still be a shortfall of $1.2 million by 2019-20. Electing for the $300 levy plus $200 in LOR is the first scenario where the district ends up in the black by 2020. At $541,306, the unreserved fund balance would represent 3.2 percent of the overall annual budget, well short of the district's 12 percent goal and the board's unwritten goal of 17 percent.
If the board authorized the full $724 per student available, the ending fund balance of $2,493,884 would still fall short of the board's preferred 17 percent by nearly $400,000. It exceeds district policy by nearly $500,000, however.
"I think this further compels up to continue being conservative," said board member Valarie Wallin. "We need to continue to be careful, purposeful and stay within our means."
The board is required to pass a resolution by Sept. 30 stating how much levy funding they preliminarily intend to pursue. The figure will be finalized in December. Business manager Jenny Max said that in December, the board could choose to take less of a levy than initially planned for in September, but they couldn't "go the other way," meaning they could not levy for more money than was decided upon in September.
Impact on the local tax base was a concern for board members. Twenty percent of a board-approved levy would be state aid with the remaining 80 percent paid by taxpayers. LOR funding would not be equalized by state aid; 100 percent of the potential $424 per student would be taxpayer-funded.
"Knowing that it's not voter-approved, it's a little different ball game," said Bolz-Andolshek. "For our district in particular, because we don't have a levy ... it's a big step."
The board requested further information on how these various levy scenarios would impact an individual taxpayer. Lindholm said they would be able to calculate those figures, and the information would be available to the board prior to preliminary levy approval.