East Penn Zero Tax Increase

The East Penn School District should be congratulated on its zero tax increase budget for the upcoming 2013-14 school year.  It is a wise political move to decouple any tax increase from the county’s reassessment, especially in an election year.  Most interesting is asking how this zero increase is possible now, in spite of all of the doom and gloom that we’ve heard about a $4 million deficit in the current expiring budget for the 2012-13 fiscal year.

At a May, 2012 board meeting, Mrs. Donches gave a lengthy exposition proposing alternate budgets where she made many estimates of the fund balance looking both backwards and forwards.  For six years starting with 2007-8 and ending with 2012-13, Donches projected ending fund balances of $7.8, $9.7, $10.0, $11.8, $13.2 and $12.1 million.   Mrs. Donches was generally castigated for projecting such high, growing numbers since even the 2012-13 budget used a beginning fund balance of only $10.0 million.  At the time, I thought that she was underestimating, writing on June 5 that “we can project that under the preliminary final budget recently passed that the EFB leaving 2012-13 might actually exceed $14 million!".  More about that later.

At EPSD school board’s June 2012 final budget approval meeting, Mr. Earnshaw went into more detail about the deficit he saw, saying that they were already using about 40% of the $10 million fund balance in this budget. (page 6)  Mr. Ballard said that a statement was made (by another board member) that there was no reason to have a tax increase. (page 7)  Earnshaw went on to explain how that a zero increase for 2012-13 would use another $1.2 million from the fund balance, or $5.2 million all together, consuming it less than two years.  (page 6).

So in light of this, how is a zero tax increase wise or possible in the 2013-14 preliminary budget, when the new budget has an even larger $5.5 million apparent built in deficit?

After much more research into the matter, including communications with several involved with the budget, I’ve come to two basic conclusions that explain this mystery:

1)  EPSD’s fund balance has always been much greater than expressed in its budget documents.

2)  In spite of the deficits called out by many, EPSD has always recently operated with an annual surplus.

In other words, things are not what they seem to be.

On the first point, even my estimate of a 2012-2013 ending fund balance was understated.  Sitting in the audience during the October 22 school board meeting, manipulating just three numbers from the treasurer’s reports attached to the agenda, I computed an 2011-2012 ending fund balance of over  $15 million.  One reply to my note to some board members to share that good news was, “I do not agree with either your 'facts' or your conclusions.  I don't believe the auditor's results, either from the state, federal or internal reports, agree with the figures you cite.  You are entitled to hold any opinion you wish to hold, no matter what the facts are."

Interestingly, within a few weeks, the business office confirmed my 2011-12 ending fund balance estimate of $15,043,570, and that number  appeared in bond refinancing documents at the end of 2012 and is still used in the current budget documents!

There has been much debate about how much fund balance EPSD has, never mind what it should be.  I will not get into that except to say that once you have a fund balance, no matter how small or large, you need to be very careful in how you spend it down.  If it gets too high, it should be spent on only one time non-recurring (one-time) expenses.  If the fund balance is used to balance the budget, it should be metered out very slowly, at a fraction of a percent  in a year.  The thing though that is surprising at EPSD is the disagreements about how much the fund balance actually is, never mind what to do with it.

On the second point, the apparent $4 million deficit for 2012-13 and now $5.5 million deficit for 2013-14 that Ballard, Earnshaw and others have been so vocal about probably don’t even exist, except on paper.  Of course no one can predict the future, but history teaches us much.  My make-good analysis for 2010-11 (attached here as a .pdf or as foto) shows that there was a $2.7 million surplus instead of a $1.7 million deficit (even after subtracting the $5.4 million reserve).  Likewise, my make good analysis for 2011-12 shows there was a $3.2 million surplus instead of a $3.1 million deficit. 

Some of this discrepancy is because of neceassary and natural conservatism in making the revenue estimates, which except for setting some tax rates are totally out of any human control.  But surprisingly, these make good analyses show a $3.4 million surplus in 2010-11 for the instruction, support and operations categories, and a $2.6 million surplus in 2012-13.  This is shocking, since we are always told that 90% or more of the spending side of a school district budget is fixed by head counts, negotiated salary contracts, and easily computed benefit formulas.  There shouldn’t be that much discrepancy in these budget estimates.  The nearly $6 million in just the 1000-3000 series spending accounts over two years is equivalent to about 40 teachers or 4% of the real estate tax revenue. 

Mystery solved – EPSD doesn’t have a deficit – rather it has had a large surplus recently.  This has allowed the fund balance to grow from $10.0 million to over $15.0 million in just two years.  While some of the good news is on the revenue side, there actually was a $0.5 million revenue shortfall in 2010-11.  Most of the variance was actually in the unusually conservative spending estimates, which on average was $3 million average.  With this built in advantage, it’s not a stretch to say that the spending plans have almost no basis in reality, and have plenty of room for future growth built in.  That’s how a zero increase is possible for 2013-14!

It’s difficult to predict the future, but the $20 million fund balance that Mr. Ballard targeted  last June may actually become a reality in a couple of years. 

More troubling to me, though. is if adding to the fund balance retention is good for the district, its students, its employees, or its taxpayers.  Some classrooms are crowded so would taxpayer money  be better spent to improve services.  Employees agreed to pay freezes, but now it seems, that was in the name of increasing the fund balance.  Finally, with depressed interest rates, the district's return on the held money is probably much less than the benefit it would give to its taxpayers.