Board strategizes on district budget with IASB financial guru

Daily Reporter Staff

As they prepare to embark upon another year of cutting the district's budget, Spencer school board members found a friend in Larry Sigel, the school finance director for the Iowa Association of School Boards, Thursday afternoon.

Superintendent Greg Ebeling began the cordial "virtual presence" discussion with Sigel, conducted via a Polycam, by saying, "We know that we're dealing with a constant battle of school finance, like a lot of districts are."

As Sigel told board members "there is no silver bullet," he explained there are several key pieces to consider when reviewing a district's budgetary figures and preparing to make cuts. Trends in enrollment, unspent balance, unspent balance per-pupil and solvency ratios are among these. (Refer to "Spencer School District's General Operating Fund" for recent historical data on each.)

Sigel began his presentation by stating, "If you want good company, this enrollment trend you have is shared by about 250 districts across the state of Iowa to one degree or another. I think the biggest challenge for school districts is the (budget) formula is a per-pupil formula."

While every student gained brings $5,546 into the district's coffers this school year, Sigel noted Spencer's enrollment is estimated to have dropped over 150 students between fiscal year 2003 and fiscal year 2010.

"Of course, your challenge is every one that you lose takes with them, effectively, $5,546," he added.

The IASB financial advisor then turned to Spencer's projected unspent authorized balance figures. Noting the downward trend in this balance started for Spencer in fiscal year 2002-03, which also coincides with the district's declining enrollment trend, Sigel asked board members, "I'm assuming that you guys are no different than most other school districts in the state in that you settle (in negotiations with staff) for about 4 - 4.5 percent a year -- but your money did not grow by 4 or 4.5 percent, or whatever the settlement was? So, where is it going to have to come from? In your case, just like a lot of districts, it's eating your unspent balance.

"That's one of the things that is something you've got to keep your eye on," he cautioned, "because I know $3.5 million is more money than you could ever possibly go through.

"But, it's no secret that there are a lot of districts in your part of the state that have substantial amounts of unspent balance and relatively short order," Sigel said, citing Algona and Spirit Lake. "It is so very easy to go through unspent balances. And one of the reasons why is ... problems always seem to snowball and grow."

As he acknowledged one budget philosophy is for districts to make moderate reductions when needed vs. having to make large cuts later, Sigel encouraged Spencer board members to keep their eye on this area as they start to work on budget projections for fiscal years 2010 and 2011.

"At a $100,000 or $200,000 (decline) a year, you guys can go for a long time without having to make changes," Sigel said. "But I will also tell you that right now one of my biggest concerns is not the across-the-board cuts that we just went through. ... My real concern right now is the allowable growth rate for fiscal (year) 10 and fiscal 11. That 4 percent that was set for fiscal (year) 10, very honestly, is not safe until the legislature adjourns at the end of this legislative session -- because they could go in and revise that."

When board members questioned whether they should delay cutting the budget for a year, Sigel cited West Bend-Mallard's recent overspent budget and warned, "It's worth talking about what's the implication of going through your spending authority and going negative. They passed a new law two years ago that basically said anytime a district is negative two consecutive years, they're subject to a Phase II audit by the School Budget Review Committee and the state Board of Education. The punch line to this is the state now has the ability to close a school district, merge it or do whatever based simply upon not whether it's educating its kids, but simply whether it is financially viable."

He continued, "And the scary part about a Phase II visit, it not just triggers a financial liability audit, it triggers a full accreditation review -- with no preparation time. The stakes are higher now."

As board president David Schlichtemeier expressed his concerns about the district's solvency ratio slipping from 15 percent to just under 3 percent during his tenure as a board member, Sigel told him, "Of all the key trends that I look at, this one concerns me the least. ... Districts can easily operate with a 3 - 5 - 7 percent (solvency ratio).

"But is the trend an issue? Yes, I think the trend is an issue. And, I think you probably need to start taking steps to arrest that trend. Three percent for a district your size is probably about as low as I'd want to be. ... I think this may be a good year to look at your cash reserve levy (and levy more into next year's budget)."

Another alternative available to school boards to address their district's solvency issues is participation in programs such as the Iowa School Cash Anticipation Program. ISCAP, which Spencer has taken part in for several years, allows districts suffering temporary cash-flow deficits to pool their cash and borrow it back at a relatively-low interest rate.

When Sigel was asked what unspent balance target district representatives should shoot for, his reply was, "The average statewide solvency ratio is 8 - 12 percent. The 12 percent is probably more akin to smaller districts; the 8 percent is for larger districts like yourself. ... But as far as unspent balance goes, I think that you guys would want to be looking at a minimum, no less than 10 percent. That would be the absolute floor, in my opinion, that you would want to look at. And, I'm thinking that you guys would want to be looking at 15 - 20 percent on an ongoing basis.

"I think you guys are in the range where you want to be right now," he added. "But, certainly anything under $2 million, I would be getting very nervous about. That would be about 10 percent."

Sigel's 2009 legislative predictions, their perceived impacts on the district budget

As Spencer's superintendent and school board members ready for upcoming negotiations with district staff, they asked Sigel to explain what he foresees happening during the legislative session set to begin Jan. 12. The IASB school finance director noted he's hopeful right now that Iowa school districts will maintain the 4 percent allowable growth rate promised earlier by legislators.

"One of the positions we're taking is even if they don't think they can honor the whole 4 percent allowable growth, we are better off with an across-the-board cut than we are with a lower allowable growth rate," Sigel told the board. " ... But would I, in the back of my head, be planning for if they cut it to 2 percent? Yes."

"Honestly, I don't think we're clear out of the woods for the current fiscal year yet, from an across-the-board cut standpoint," he added. " ... But if we do go through another across-the-board cut this fiscal year, likely that means they'll reduce revenues also. But, the ball is in play until the last day of the legislative session. So, if I were going to give you some advice, it would be: From a collective bargaining standpoint, I wouldn't move quickly. And if I did move quickly, I would make sure you have re-opener language in the event of reduced allowable growth beyond an estimated percentage. ... My advice is to go slow with your (bargaining)."

Sigel then advised Spencer board members to cut what they need to in the budget each year, instead of letting the potential financial problems multiply.

"The objective of the budget is to implement the goals and objectives of the district. You've got to go back and talk about what your district priorities are, and then make sure you fund the core (curriculum) and those priorities," he said. " ... I think if you start the budget process first with what your district's goals and objectives are, what the priorities of the district are, and then let that drive your budget process, I think it's going to make it easier. And, do it on an ongoing basis -- so you're not faced with ($1.1 million in cuts every year, like last year)."

Spencer School District's General Operating Fund

* Italicized numbers are estimates.

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