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The Q3 report identifies several areas that are not entire surprises; and yet also not how we budget:

• Transportation-related increased costs of $700K are driven by increased retirement rates, increased staff turnover due to the low hourly rate and no benefits that are training with the WISD and then taking better-paying jobs elsewhere, aging fleet requiring more repairs, increased # of students claiming ‘homelessness’ and requiring transportation to the home school (McKenny-Vento Law), and increased cost of fuel.  During our quarterly transportation committee meeting, the WISD discussed these issues at length.  These costs are a good example of one of Rick Snyder’s ‘best practices’ can end up costing us more than we expected ($1.5M last year; $700K this year; next year?).  
• Substitute teacher costs: despite reassurances that moving substitute teacher accountability to the building principals, this has not generated cost savings (per last year’s budget reduction strategy).  This area must be addressed through changing events that drive the need for substitute teachers (meetings during the 170 school days) and leadership from both the AAEA and building principals.
• Healthcare costs: Finance is asking for $300K to be allocated for this expense in case we need it.  I am fine with approving this, but there are implications for FY14 that we should be incorporating into the budget process.

Looking forward, I asked what the expectations might be for Q4.  I was reassured that this adjustment to our budget would likely not all be needed, but that this would be important if we did need it.  I have long been advocating to maintain our fund equity at a level where we don’t need to borrow to make payroll.  We have a Board policy that requires us to maintain a 15% fund equity balance (this would be closer to $28M).  We have voted to reduce fund equity to below our policy in order to maintain programs and smaller classroom sizes.  Our colleagues nearby are at 40 -50 students/classroom.  We want to avoid that because we believe smaller classroom sizes are an important component of a high quality education.

We find ourselves with an estimated FY13 fund equity balance of just below $7M (we started the year with $16M in fund equity; planned to use $4M of it based on false estimates that we only needed $9M to cover payroll).  Since we now have to do what many other districts are already doing, we will be borrowing $10M to cover cash flow from gaps in the timing of receiving tax revenue disbursements from the state (gaps exist in July, Sept and end of Dec/early Jan).  This borrowing means we will have to cut another ~$150,000 from our general operating budget.

I asked what the # is that we need to cover cash flow and finally have an answer that I can believe: $14M – $16M.  Let’s call it $15M.  This should be the bare minimum in our fund equity.  However, that just helps meet cash flow requirements.  It does not help absorb our capacity to incur increased costs (some of which more financial controls will help, but several are driven by outside entities like the federal government, state government and cost of goods like fuel).

Q4 Implications:  I believe we will have yet another negative adjustment for Q4, ending the year with less than $6M in fund equity.  While we may not need to use the full $1.3M allocated, we continue to ‘find things’ as we move to line-by-line accounting (a practice we asked of this Superintendent when we hired her, as well as zer0-based budgeting; we had been trying to get Finance to implement this for two years with no movement in this direction, so this was a big expectation of her).

FY14 Implications: In both recent quarterly reports, there are several things that we should be using to budget for next year; all of which would translate into more cuts, but would avoid these kinds of ‘surprises’ for next year’s quarterly report – which we will no longer have the fund equity to absorb.  Here’s just a few that translate into more cuts (for me) for next year:

• If we maintain transportation at the current service level, we will likely incur the same cost overrun – plus some.  The things driving this adjustment will not change from this year to next, so we can expect to spend about the same ($5.5M) in transportation costs.  
• In addition to the transportation costs we had this year, the implementation of healthcare reform will cost us more for transportation services, which we have constructed as a ‘pass-through’ contract (meaning we pay for any increased costs; only contracting privately would avoid this).  Next year, the WISD will have to offer health insurance to these employees since they exceed 50 FTEs.  I asked the WISD to develop 3 cost scenarios for us to consider, including incurring a fee for not providing health insurance.  This cost will hit is mid-fiscal year next year, since the law takes effect in January 2014.  I expect this will be another significant cost overrun – unless we budget for it now.
• The use of teacher consultants to offset increased class sizes will save us much less than the projected savings for any teacher FTE reduction.  I have been asking for the average cost of a teacher consultant and a teacher assistant for over a month now.  If I ever do get that #, our net savings will be ((# teacher FTE reductions)-(# requested teacher consultants)=net savings.  I could estimate that the savings would be closer to $15K – $20K per teacher FTE reduction (vs. the $100,000 we’re estimating).
• We need to add the interest cost of borrowing $10M to our budget, or another $150K.
• Since we did not adjust professional development days as part of the calendar, we can expect similar costs next year.
• I have not seen a plan to mitigate substitute teacher costs, although I have asked for one.
• The federal sequester will impact IDEA grant funding, meaning we will receive less funds for special needs students.  This will have to be ‘covered’ by the general fund and will feel like a ‘surprise’ unless we budget for it.  Most discretionary budgets (which this falls under) were cut by 5 – 8%.  We could estimate that impact and budget for it.
• Reduced best practices funding and other sources from the state: if we have a similar experience as last year, the state will adjust downward what they actually pay us for best practices.  If similar to last year, this will occur after we have approved our budget.  There are $0 proposed for best practice funds from the state for the FY15 budget, so this will increase the ‘gap’ we need to fill by ~$3M.
• We should also be budgeting for some decline in students.  I would normally argue against this, but since we no longer can absorb cost overruns, if our population were to decline, our revenue associated with our general foundation allowance declines accordingly.
• I do believe there are wellness incentives that we can explore that would minimize increased healthcare costs.  There are many organizations that are developing technologies to make it easier to track exercise, food intake and lifestyle/fitness levels as well as remote monitoring of chronic illnesses.  There are many payors (insurance companies) and employers developing wellness incentives.  These should be fully explored.

If you watch our Board meetings on CTN, you will hear me cover each of these issues.  If you read one media source, you will not be made aware of these concerns (and they have a concerted effort to edit out my discussion points).  When we see the criticisms start to roll regarding how inept the Board is, it will appear that these items above are not being discussed.  I can assure you that this is not the case.  Between DonBee (I believe this is Bob Rourke, but that’s just my guess) and some of the other self-proclaimed experts on one blog, the negativity will fester.  We need to remember that during this time of great need for a vastly different public education funding model (more, not less), we have to stick together as a team to solve these problems.  We have to rise above the negativity and be part of the solution.  Some of us do have these concerns and are expressing them.