It certainly is amazing how things can change in a short period of time. Not that the future is rosy for school funding in Michigan, but it does not appear to be as bad as it was only two months ago. On October 19 Governor Granholm signed House Bill 4447, which included a $165 per pupil reduction to the foundation allowance and vetoed $51.5 million of section 20(j) funding for higher foundation allowance districts, which was $248.18 per pupil for my district. Then, on October 22, State Budget Director Robert Emerson sent a letter to district Superintendents that School Aid Fund revenues were insufficient to fund the just enacted legislation, and a further cut to the foundation allowance of $127 per pupil was necessary. All along we were told to anticipate a foundation allowance cut next year of between $300 and $700 per pupil. On December 10, Governor Granholm announced that she was pausing the $127 per pupil reduction. Then, on December 23, the Senate Fiscal Agency released their revenue estimate and stated that there was no need for the $127 proration and that the School Aid Fund would be short ONLY $215 per pupil next year. Finally, on January 6 the House Fiscal Agency said the School Aid Fund would be short $300 per pupil next year. So, depending on what set of numbers you use, the two-year shortfall to School Aid Fund is between $380 and $992 per pupil – quite a range.
The challenge we have as School Business Officials is communicating this to our Superintendent, Board, and community, and most importantly having credibility. The dictionary definition of credibility is the quality of being believable or trustworthy. But how can we have credibility when the numbers that we deal with keep changing. Not only are they changing, but quickly and substantially. With the bad news coming out of Lansing these last few years, I started citing the sources of my information and encouraged those people I am addressing to check my facts. In anticipation of large budget cuts next year, our district held a series of informational sessions on how schools are funded in Michigan called School Finance 101. I made sure that when I used estimates for the future, I cited the source of my information, such as the Senate Fiscal Agency for per pupil revenue estimate and the Citizens Research Council for future retirement rate estimates. This lends credibility to the numbers I am presenting which in turn gives me credibility and assures my audience that I have done my research.
The constant changing of foundation allowance estimates for this year and next requires us to constantly update our financial forecasts. The dictionary defines a financial forecast as an estimate of future financial outcomes. It is described as an economist’s best guess of what will happen to a company (school district) in financial terms over a given period of time. The definition went on to say that arguably, the most difficult aspect of preparing a financial forecast is predicting revenue. I think I am going to use this definition as a prelude to every one of my financial forecasts from now on. Think of all the estimates we use and information we need to consider when building next year’s budget and forecasting future years. We already know that foundation allowance estimates from the state fiscal agencies will fluctuate. We also know that taxable values must be considered as well. My local assessor informed me this week that taxable values will drop for next year. This will not only put more pressure on the School Aid Fund to make up the difference, but may also require those districts that levy a hold harmless millage rate to increase the rate next year. It will also require districts to increase their debt levy to make the required principal and interest payments.
The Detroit News reported recently that the population in Michigan is now below ten million. What effect will this have on state revenues? Fewer people means reduced income taxes and reduced sales taxes, which both negatively affect the School Aid Fund. It also means fewer children, but this is a double- edged sword. Fewer children translates into fewer children to be funded, but also means fewer children for your district. And if you are a schools of choice district hoping to offset your enrollment loss, will you be able to attract enough students when the student population is going down. How do you account for these population trends in your enrollment forecasting?
The retirement rate is another big item we need to estimate for. The Dow Jones Industrial Average ended up 19 percent for calendar year 2009. So this means the retirement system should have made some good investment returns and our retirement rate increase for next year may not be so big, correct? Remember, the Dow was down 34 percent the previous year, and is still more than 25 percent down from its October 2007 high. And, the retirement system uses a five-year smoothing method when it calculates retirement rates, so will the increase for next year be big or small?
Now that we have successfully estimated the revenue portion of our budget, which the dictionary tells us is the most difficult aspect of preparing a financial forecast; we can easily predict our expenditures. Price Waterhouse Coopers issued a report that predicted health care inflation of nearly 10% for 2009. The Segal Company’s “2010 Health Plan Cost Trend Survey” projects medical plan inflation in 2010 will be similar to 2009, ranging from 10.2% to 10.8%. However, Price Waterhouse Coopers also stated that “for every 1% increase in unemployment, there is an influx of an additional 1.1 million uninsured Americans,” which in turn puts pressure on private sector premium increases. With unemployment hovering around 10%, how can this not negatively impact our rate increases for next year, and by how much?
The numbers we use today to estimate our budgets and do our financial forecasts will no doubt be different next month and different again in June. As Business Officials, we need to remind our constituents that the numbers do change and they will continue to change. Change, however, should not take away our credibility. Give them the sources of your information, and give them background on the challenges we face doing financial forecasts in an uncertain environment.
