June 8, 2010

The inescapable costs of running a school system

Purpose

The purpose of this review is to help readers better understand the basic issues that frame all budget discussions about Wake County’s public schools and outline some of the financial  challenges the system will face in the near future.

Wake is currently in the second year of what many policy makers believe will be a three- to four-year decline in per pupil spending. While enrollment growth has slowed considerably, at least 3,000 to 4,000 additional students per year are expected to move into Wake County’s schools in the coming years.

At the same time, a majority of the school board would like to significantly increase school choices available to parents. About 22 percent of Wake’s students currently choose the school they attend. In general, offering more choices tends to increase transportation costs. In some cases it can also increase program expenses.

This summary provides a broad overview of school finances from the basic budget process used by the county to issues the system is likely to face during a time of declining revenues. It is not a comprehensive review of the system’s $1.2 billion operating budget.

It is best used as a reference guide that allows readers to better understand the options facing the school system in the coming months and the likelihood of starting new initiatives without additional cuts in current programs.

This is the fifth topic review offered by the Partnership this year. The previous reports, which covered issues of student assignment and school calendars, can be found here.

Summary

For the first time in the memory of most educators, school leaders were relieved this year to be told funding from the county is likely to remain flat at $313.5 million. After 18 months of freezing positions and cutting services – a period that roughly parallels the national recession – this qualifies as good news.

Local school districts already know the state will provide less money per pupil in 2010-2011 than it did last year.  The final amounts won’t be known for at least several weeks, but the decision will be critical because the state provides about 56 percent of the Wake school district’s operating money.

It’s in this environment that the current school board is trying to offer families more school choices, craft a new student assignment plan and possibly increase magnet school seats by operating the schools on a year-round schedule.

No details have been offered about the possible costs of the changes. The experience of other school systems suggests virtually every additional choice will cost more.

Given the size of the Wake County school budget, conventional wisdom suggests there should be plenty of places to cut the budget. And there are plenty of places to cut. There just aren’t a lot of places to make big cuts – except the classroom.

About 89 percent of a $1.2 billion operating budget is spent on people, supplies and training inside the schools.

In contrast, about 1 percent is spent on administrative services. Roughly 6 percent is spent on auxiliary services such as heating, maintenance and other centralized functions. As the current board majority understands, these areas cannot be cut wholesale.

The kind of cuts that could substantially reduce the budget would require a systematic financial overhaul. The changes would be so significant that the current debates over how to assign students would pale in comparison.

For example, the footprint of every high school campus – and many middle schools – assumes the need for separate football stadiums, baseball facilities and a host of other sports venues.  They can be shared. Smaller, less efficient schools could be closed. Wake’s admirably high building standards could be reduced. Thousands of jobs could be eliminated. Every high-cost class from Advanced Placement courses to the arts would need to be scrutinized and potentially dropped.

None of this is likely. Some of it is academically ill-advised. But it shows how much different the school system would look if it tried to operate on 80 or 90 percent of what it has today.

It also illustrates why the current school board is forced to live with the financial realities and community expectations that have shaped past budget decisions. They have no choice in the short run.

It is possible to address some of the issues by simply spending more money.  Using per pupil spending as a guide, Wake County spends less than the state average in a state that ranks below the national average.

But there is little the school system can do about extra revenue in the short run. Taxes will not be increased during a recession for virtually any reason. When more money is provided, it will almost certainly be used to handle the expected growth of the post-recession years.  

This is not to suggest the current board is handcuffed from making changes that can greatly affect many families. But taken as a whole, the financial realities facing Wake County will severely constrain the board’s flexibility. It’s a difficult time to be adding choices without removing services that are already offered.

Understanding the details
 
A few basics:

There are three basic facts that answer a disproportionate number of questions about why the school district spends its money as it does.

1. About 56 percent of the money comes from the state. For reasons dating back to the Great Depression, counties are responsible for building the schools and the General Assembly makes sure there is enough money to keep the doors open. That means school officials don’t get to keep any state money they happen to save. The most frequently cited example of this is state transportation money. Counties can pitch in extra money – and most do – but it’s not required.
2. School boards have no power to raise money. That’s unusual – about 90 percent of the school boards in America do have that power – but that’s how it works in North Carolina. That means the school board relies on the county commissioners for local funding, putting it in direct competition with needs such as health services, parks, public safety and libraries.
3. School districts can’t spend construction money on operations. If the county commissioners ask voters for permission to spend $1 billion on new buildings, the board of education can’t turn around and pay teachers with it just because they were running a little short. In the current budget crisis, that means jobs are cut even as new schools open.

There are many other laws and policies that govern how money can be spent. But remembering those three will address a surprising number of questions regarding why schools don’t just take money out of one pot and place it in another. It turns out flexibility is a subjective term when it comes to school budgets.

The coming year:

It could be argued that the school board has only two big financial challenges ahead – the 2010-2011 year and the ones that follow. While that’s simplistic, it’s also true. And of the two challenges, the coming school year is the easier one.

In some ways, Wake County is lucky. It at least has some local revenue growth. It’s not enough to fill the expected hole in state funding, but something is better than nothing. The best indicator of what to expect for roughly the next year can be found by tracking building permits.

That’s because county revenue is heavily dependent on property tax collections. New construction means more property tax revenue. Wake’s building permits dropped dramatically in 2008. The first four months of 2010 have shown a rebound, but it is hardly robust.

The second most important source of local tax revenue comes from sales tax growth. That is true at the state level, too. Sales tax growth has been declining in Wake and throughout the state since 2008.

The most important source of revenue for the state (see rule #1 above) is income tax. The unemployment rate in North Carolina stands at just under 11 percent. That pretty much explains the problem with income tax collections.
 
This means declining state revenues for all school systems at a time when counties can’t afford to fill the gap. Wake County has already cut $20 million from next year’s budget. An estimated $6 million to $20 million more will be needed before the cutting is done.

Parents are most likely to see the budget strain first in the area of busing. The school board offered traditional and year-round calendar choices to all parents in 2010-2011. It approved more than 1,000 reassignments and it is scheduled to open four new schools.

The board knows the current bus fleet will be pressed to meet all the needs, but it does not know how pressed because it did not ask for a transportation analysis. If there aren’t enough buses to get everyone to school on time, it will become obvious within the first week of school.

The second area where budget shortfalls could surface is class sizes. About 3,800 new students are expected to enroll next year. And no matter how many times parents are asked to enroll children early, many don’t show up until the first day of school.

In a more typical year, the budget would allow for last-minute adjustments by hiring an extra teacher or two where needed. That flexibility may not be available this year, which means more teachers might find themselves reassigned after the year begins.

But barring mid-year cuts from the state, most budgeting challenges should be known early next year. The larger challenge, according to budget planners from the state level on down to the local schools, will be the 2011-2012 school year.

The funding cliff:

Even before new school board members were sworn in on Dec. 1, budget forecasters were talking about something called “the funding cliff.” What they mean is the end of federal stimulus money that is currently filling huge holes in many state budgets.

In North Carolina, that funding cliff translates into a minimum cut of $35 million for Wake County’s schools in 2011-2012 unless state revenues pick up substantially. This is why talk about a “double-dip” recession is so frightening to school leaders.

At the moment, state forecasts do not suggest the money will be there to replace the loss of federal stimulus funds. Growth estimates at the county level are a bit better, but hardly rosy.

The timing of these forecasts coincides with many of the largest assignment decisions facing the current school board. Board Chairman Ron Margiotta, for example, has suggested magnet programs operate on year-round calendars in 2011-2012 to expand their reach.  Magnet programs cost about $350 more per student to run than traditional school programs.
 
Financial details should also emerge by next year about the board’s plans to use a community-based assignment model in 2012-2013. Although campaign promises in the fall suggested neighborhood schools would save on transportation costs, most of the board majority has quietly backed away from that claim since taking office.

No cost estimates have been made for either the magnet school proposal in 2011-2012 or the community-based assignment plan the following year. What the board has done is commit itself to offering as many school choices as possible while maintaining a magnet school program as a “voluntary desegregation tool.”

Next steps:

The current budget and future economic forecasts suggest the board’s resolve in both areas will be put to the test. State law requires school districts maintain a balanced budget. Concepts and plans are free, but all programs ultimately come with a price tag.

Along the way, certain indicators will provide clues about the school system’s financial ability to make changes – indicators such as the building permits, sales tax revenue, unemployment rates and even the bus routes and teacher reassignments outlined above.

But eventually, the inescapable costs of running a school system will be reflected in the bottom line of the school system’s budget. Money does not dictate a school system’s choices. It does define its realities.

Links:

Proposed budget of Wake County Public School System
Proposed budget of Wake County Commission
Fiscal Year 2010 county budget highlights (presentation)
North Carolina Fiscal Research Division May report

Wake Education Partnership is a 501(c)(3) non-profit created in 1983 to support public schools, in part by educating the community on current school issues. Most of its financial support comes from individuals and local business. For questions about this report, contact Tim Simmons, VP of Communication) or Julie Crain, VP of Programs. This topic review can also be found at our website, www.wakeedpartnership.org, under the tab titled News Center.