MEA Admits It: Spending Fund Equity is a “Band Aid”

The Michigan Education Association’s official position on spending Fund Equity in response to the K-12 funding challenge says it better than I could.  They acknowledge it is a “band-aid.”  The leadership of the Grosse Pointe Education Association would be well served by not cherry picking the position of the MEA and taking a long-term view for the well-being of the Grosse Pointe Public School System.

I’ve written about Fund Equity previously and we need to revisit the topic now.

The topic got statewide attention last week when the House Education Committee Chairman, Rep. Tim Melton, sponsored legislation that would not allow K-12 school districts to maintain fund equity levels greater than 15% of their budget.

To provide some context for Grosse Pointe Public Schools, our Fund Equity is about 17% of our $105,000,000 General Fund budget.  So this bill would require us to spend $2,500,000.  To put THAT into context, our projected budget shortfall for next year is about $7,500,000.  So this would amount to Lansing “helping us solve” 1/3 of our problem.

So in the grand scheme of things, is this that significant?  After all, we DID spend $2,600,000 of our fund equity in October 2009.  Did our problem go away?  Of course not.  Spending more to mask rising salary, health care, and retirement costs never solves the problem.  But here is the significance of these discussions:

1. By taking this action, Lansing is acknowledging that 15% is an appropriate level of Fund Equity.  The leadership of the Grosse Pointe teachers union, the GPEA, disagrees.  They have publicly advocated that Grosse Pointe’s Fund Equity levels should be reduced to 7%.  This provides their justification to fund additional annual raises (on top of the standard steps and lanes) of nearly 6% over the next three years.  Why would they think this way?
2. The GPEA is an affiliate of the Michigan Education Association (the MEA).  The MEA’s lead economist, Ruth Beier, testified in Lansing in support of this bill.  This is no surprise.  But what is more significant? The MEA thinks 15% is too high. They believe 5% is the right amount.  So the leadership of the GPEA is more fiscally conservative than the MEA…by2%.  So we’ve got that going for us.
3. Of greatest significance is that the MEA acknowledged that even spending fund equity is not a long term solution.  The direct quote from Ms. Beier is, “While we (the MEA) support this bill, we know that this is a short term solution.  It is a band-aid rather than a cure.  We caution against relying on this one time fix, and urge the legislature to come up with a way to close the structural deficit in the School Aid Fund.”  Ms. Beier, you and I could not agree more on that point.

So the GPEA leadership is dutifully singing from the MEA hymnal locally, but conveniently ignoring the second leg of their proposed “strategy” – one that is dependent on Lansing  to solve the long-term problem.  The leadership of the GPEA wants the taxpayers of Grosse Pointe to fund nearly 6% of additional raises to those on the top end of the salary scale by using fund equity when the leadership of the MEA acknowledges that without other structural change from Lansing, spending Fund Equity is nothing but a band-aid.  How many taxpayers in Grosse Pointe want to buy a $10,000,000 band-aid?

Lansing politicians haven’t shown the skill, will, or resolve to address the K-12 budget problem.  The politically convenient solution for them is to kick the can down the road, as they’ve been doing for years.  I’m not willing to bet the future of the Grosse Pointe Public School System on a sudden transformation in Lansing.

I’ve asked before and I will ask again.  How many of the taxpayers of Grosse Pointe have any faith that Lansing will address the structural deficit in the School Aid Fund that the MEA acknowledges exists?  The fact is they either don’t know how to do it, don’t have the will to do it, or are content to let the local school districts solve it on their own.  Until I see a shred of evidence to the contrary, I’m betting we need to solve this on our own.

I’ve been saying this for my nearly five years on the Board.  This problem is real and it is all ours.  There is no back door.  There is no way to avoid it.  Ignoring it only makes it worse.  The responsible school board takes a long-term approach to this problem.  Spending $10,000,000 of fund equity to fuel escalating salary, retirement, and health care costs without a pre-identified and agreed upon long-term solution would be nothing short of irresponsible.  I believe the taxpayers of Grosse Pointe want the school board to take the long-term view. I’ve written about it before.  This is the New Normal. We had better be able to deal with that.

Kudos to my friend and Birmingham Public School’s school board trustee Rob Lawrence for raising this issue in his blog.  Rob was able to get the documented testimony on this bill and posted it online.  You can see it below with Rob’s comments typed in red within it.

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Retirement Rate Increase: Granholm’s Back Door Cut

Things are starting to look eerily and sadly familiar in Lansing.  In the spirit of March Madness, Governor Granholm is attempting a back door cut that would make legendary North Carolina coach Dean Smith smile, but local school districts frown.  Let the political games began.  It’s Budget Madness.

A few weeks ago Governor Granholm unveiled her rough budget proposal.  As it related to the School Aid Fund, the source of 65% of GPPSS’ revenues, Granholm eagerly proclaimed that she would veto any budget recommendation that reduced per pupil funding.  Some estimates have the required per pupil reduction nearly at $268.  It doesn’t sound like much, but to our district that would reduce our revenue by $2.7 million.

So yeah for Granholm?  Hardly.  The beleaguered lame duck gov was less bold in her proposed increase to the school employee retirement system (MPSERS, discussed in detail here).  In her proposal, the MPSERS rate would increase from 16.9% to 19.4%.  For reference, this is the percentage of salaries paid to employees that the district must contribute on their behalf to their retirement pension and benefit fund.

Since there is NO discussion of an increase in the Foundation Allowance next year, translated into next year’s budget, that increase from 16.9% to 19.4% represents a loss of almost $1.4 million.  So net/net, this is the equivalent of a cut of about $175 per pupil.  Governor Granholm, spare the spin job. A cut’s a cut.

Meanwhile, those dastardly fiends in the Michigan Senate revealed their plan the other day.  They are holding fast to their “cuts only” approach to the budget and call for a per pupil reduction of $118, or about a $1 million loss for GPPSS.  However, in the proposal they call for a retirement rate increase far below that of Gov. Granholm – moving from 16.9% to 17.08% – an increase of a more meager $80,000 to district expenses.

It will be curious how the various stakeholders react to these proposals.  I have a pretty good sense.  Granholm’s plan puts lipstick on the pig because she knows most people don’t know the nuances of the economic implications of her proposal.  But in the background, it aims to preserve a rapidly deteriorating, and perhaps terminally ill, defined benefit program at the continued expense of local school budgets – the mother-lode of unfunded mandates.  This is precisely how individual employee costs increase and why we can afford fewer and fewer every year.

The Senate can claim they are staying true to their word with more cuts, and perhaps further their plan of forcing reform on the retirement system.  But oddly, in a role reversal, the Senate’s plan is actually better economically for local school budgets – not by a huge margin, but certainly better.

To paraphrase Gertrude Stein, “A raise is a raise is a raise.”

These are the subtleties of Michigan K-12 finances.  How many school employees recognize increases in district contributions to their retirement plans for what they are?  All too often, only salary increases are recognized as raises.  Make no mistake about it.  It is a raise, plain and simple.  When an employer spends more money for an employee’s personal benefit, regardless of whether the money goes to salary, health care, or retirement, that constitutes a raise.

Despite their different means, the proposals are fairly similar.  Neither are good news for local school budgets, but neither are as bad as what others are calling for.  As was the case last year, the worst choice Lansing could make would be to sandbag the local districts again by bringing forth these options only to drop the hammer well after budget decisions are made (ala the October 2009 cuts).

This is why prudent school districts budget conservatively.  The district carries all the risk in these scenarios.  Salaries are locked in.  So are health care costs and retirement rates, but our funding remains in doubt.  Not a good combination.  Yet when we spend within or below our budgets, certain parties claim we are “hoarding” funds.  But if the cuts of October 2009 taught us one thing it is this:  The Lansing politicians have no regard for the local school district budget.  It is solely up to us to mitigate that risk.

GPPSS Budget Challenge in 5 Minutes

Last night I was invited to speak at a meeting of the Mother’s Club of Grosse Pointe South.  I was asked to provide a budget update in 5 minutes.  With that compression of time, I thought through how I would frame the challenge.  In short this was my message.

1. The state of Michigan is our largest source of funding, based primarily on tax revenues that have scaled down with the state’s loss of wealth – sales, income, and property taxes. 
2. Our per pupil funding (the state determined Foundation Allowance) has not kept pace with the rising trend of human resources costs – namely salary, retirement, healthcare, and FICA.  These are the four largest expenses in the local schools’ General Fund.
3. The friction between these two forces is the root cause of K-12 budget challenges.  Unless root cause is addressed, the problem will persist.  This can only be fixed in two ways:  Either state revenues need to start rising again at a rate at least equal to the rise in salary, retirement, health care and FICA or locally we find a way to curb the rate of growth of those same rising costs.  Any other reaction the the budget challenge only masks this root cause problem.

To demonstrate the friction of these forces, consider the following:

• With the Foundation Allowance and 20J reductions of October 2009, GPPSS’ per pupil revenues are now below those of 2005-6.  (Coincidentally, GPEA leadership has taken to the spin that this is the first time aid has actually been reduced.  My comment is:  Watch that first step.  It’s a doozy!)
• If the state reduces the Foundation Allowance another $268 as has been forecasted by the state legislative fiscal agencies, GPPSS per pupil revenues would be at their lowest levels since 2003.
• On the expense side of the ledger, even if GPPSS ends up reducing our teaching staff as we are evaluating now, the total cost of teacher retirement, health care and FICA for 2010-11 for 533 teachers will exceed that same cost for 602 teachers from 2007-8.
• According to state of Michigan statistics, the average teacher salary in GPPSS has risen from $66,799 in 2003 to $85,985 in 2007-8.  Our locally developed statistics differ from the state in this area, but not in terms of the rate of growth.

Any objective person would agree this is an unsustainable scenario.  If we recall the two potential root cause resolutions referenced above, I have no faith or expectation that state revenues will rise to meet this challenge.  How many of you think the lawmakers will vote for a tax increase of any kind in an election year?  We’re now essentially a poor state and we cannot expect our revenues to remain at previous levels – let alone rise.

So how do we solve the problem locally?  Last week Farmington schools, like Bloomfield Hills the year before, closed a handful of elementary schools.  I put this in the category of responses that mask the problem.  How does closing a school curb the rate of growth of salaries, retirement and health care costs?  It will reduce some of those expenses by reducing staff, but when you look at the expense trends it is clear that this is a temporary fix.  I’m not interested in that.

Viewing the challenge through the root cause lens is essential in evaluating alternatives.  The GPEA leadership should do this as well.  They call for taxpayers to reduce our fund equity to 7% from our current level of 17% (of total expenditures).  That’s an allocation of $10.5 million taxpayer dollars.

The GPEA leadership rightfully argues that this money is earmarked for allocation to educate the children of our community.  But the question must be asked: Is continuing to fuel the unchecked growth of salaries, retirement, health care and FICA for a smaller population of teachers the right path?  It’s masking the root cause problem in a different, but equally temporary manner. 

I’d much rather invest in more teachers than pay more for fewer – which is precisely what is happening today.  This is why class size is rising.  Who’s happy with this solution?  I have heard students, parents, and teachers alike all advocate for smaller class sizes. 

Bottom line: We have to establish a expense/compensation system that has a cognizance of our funding model.  As things stand now each has no regard for the other.  Clearly this is not working.  As a result we expend all too much time and energy on re-visiting the recurring budget challenge (as we annually mask the problem) and not as much time as we would like grinding over ways to improve our educational program offerings.

Enough is enough.  This has got to change.