Prepared Notes for Board Meeting – Forecast
October 25, 2010
Marc A. Schare – 614 791-0067
Over the past few years, I’ve come to understand that many people in our community don’t view the five year forecast as a particularly important document. The district has done a fair job, over time, of painting it as but a snapshot of district finances that can be passed and ignored. I disagree with this characterization. The forecast does represent the district’s financial condition at a point in time – now – but it also gives us insight into our past and our future. Sometimes, it even provides actionable intelligence if only we are willing to listen. Such was the case last October and again in May.
Before detailing what this document is trying to say, I have to take a moment to once again note how in Worthington, we no longer quibble about the numbers in the forecast. We assume they are accurate. This may seem like an obvious point but it wasn’t that long ago that many in our community, myself included, had reasons to distrust the numbers. This is no longer the case and we have the integrity and credibility of our treasurer and his team to thank for that.
Another thing we can thank this administration for is that FY10 made four out of the last five years that we have had a balanced budget in Worthington, meaning revenues were higher than expenses, and FY11 is on target to make it five out of six. While the generosity of our voters in 2009 had a lot to do with that, so did the hard work of our administration in determining where reductions can be made while always maintaining the quality of constituents demand.
So what can we glean from todays submission. Let’s go right to the bottom line. In May, we had a forecast that showed us a FY14 deficit of 15.6 million dollars. This forecast has that deficit completely eliminated. So what happened? Was the May forecast completely wrong? Does this result lend credibility to those who believe that forecasts don’t matter? In a word, no. We have this result because the district, faced with the prospect of double digit percent property tax increases every other year in perpetuity, took action. We responded by modifying a costly middle school structure that honestly, we had allowed to remain in place for far too long. That decision weren’t popular with parents or staff but it was necessary. In addition, we responded to declining enrollment at the high schools and moved to find other efficiencies throughout the operation. When coupled with the current fiscal year, the result is an 11 million dollar cumulative reduction in planned expenditures through 2014 which, when coupled with anticipated revenue gains, wipe out the projected deficit from FY14.
Despite our efforts, district expenses are still projected to increase at a rate that is around 50-90% higher than projected inflation. According to projected I-Bond rates, inflation is projected at around 2% annually while our forecast shows expenses increasing between 3 and 4% each year of the forecast. This works out to about 4 million dollars/year in incremental expenses which would require about 2.2 additional mills each year to keep up with the increased spending, all other things being equal.
So what are the cost drivers in this forecast? Clearly, employee health care is at the top of the list. Part of what we are seeing is the impact of an unlimited, uncapped health care expense whose costs are projected to increase by double digits in perpetuity and this forecast is perhaps representative of a best case scenario in this area. Indeed, our treasurer has increased the estimate for a health care premium increase from 13% to 16% based on current claims information. As much as we would want Worthington to believe that our levy campaigns are about sports, AP programs and student opportunities, the reality is that status-quo increases in health care costs will be a significant driver, perhaps THE significant driver of our next request. Clearly, as the state audit report demonstrated, we need attention in this area.
It should also be noted that increases in the base salary of teachers are not one of the significant cost drivers, however, the treasurer’s notes indicate that this too is perhaps a best case scenario. The impact of the step schedule, on the other hand, continues to be a significant driver. In addition, tuition to outside districts as a result of misguided state policies continues to increase at an unacceptable pace.
Turning to the revenue side, it is simply impossible to determine what is going to happen. The midterm election, the final size of the budget shortfall, any impact from unfunded mandates and Worthington’s ability to lobby the state for our fair share are all unknown so the treasurer’s guess is as good as any, but no one really knows. What we do know is that the likelihood of Worthington and other “rich” suburban districts losing funding is approaching 100% and is correctly reflected in the forecast. Most pundits believe that it is unlikely that the state can or will hold K-12 education harmless in the next biennium and even if it did, the odds that category 7 districts would be held harmless is small. We also know that the state cannot afford to continue the tangible property tax in perpetuity. The forecast assumes current state law will prevail and that is very bad for Worthington. My fiscally conservative friends should make no mistake here. A significant amount of the next levy will not be because of health care or teacher step schedules, it will be to make up for the loss of the tangible property tax – real cuts at the state level that are not of our making. The reality is that Governor Strickland has already vetoed an extension of that reimbursement and faced with anything approaching an 8 Billion Dollar budget problem, I’d bet that any Ohio governor and legislature would be forced to do the same.
Any forecast is built on a set of assumptions that get iffier the further out you go. When the TAC reviews a forecast, what we are reviewing are the assumptions and this year, while the climate may be quite volatile, the TAC believes, as do I, that the assumptions are reasonable for the time and the climate and therefore, the forecast is worthy of an affirmative vote. The one thing the forecast cannot tell us is whether a levy in 2011 is still warranted given the expenditure reductions put in place by this administration. It will be hard to justify a levy in 2011 when you do not face a deficit until 2015 but if you wait until 2012 and maintain the current assumptions, the millage amount may be higher than our community has been comfortable with. As Ohio’s budget picture starts to shape up in April or May of next year, we should be prepared to start those discussions with our community.