Sunday, May 17, 2015

School Budgeting For The Future

Recently our budget committee met to approve the Hillsboro School District budget proposal for the next school year. I provided the sole vote against the budget proposal, believing it irresponsible in light of our current financial situation. As it turns out, my concerns may be moot, since in the past week an amended forecast came out that will leave our schools with significantly more money than we thought. But I think there are some important principles here we still need to think about.

Some background: the original budget proposal calculated that we would have enough money to essentially provide the current service level, expand (as the state has mandated) kindergarten to all-day, and provide an additional $720K in targeted investments in areas such as athletics and activities.  But then the state Supreme Court threw in a monkey wrench, by ruling that recent PERS (Public Employee Retirement System) reforms were unconstitutional, creating a major new expense for the schools. Due to the oddities of Oregon's PERS accounting process, HSD would not be charged any money this year or next year, but two years from now would be facing a shortfall of around $3.5 million. The amount isn't exact-- there are a lot of other factors involved, including market performance and potential changes to the law-- but that was our CFO's best estimate.

It seemed to me that in light of this new informaton, we should be banking some money every year to prepare against this expected shortfall. Sure, it would be disappointing to have to cancel the majority of this $720K investment. But shouldn't we plan prudently for the long-term health of the district by preparing for the upcoming financial cliff, instead of just spending as originally planned in the hopes that luck or the state legislature will bail us out?

One argument in favor of the spending was that HSD needs it in order to be a top-tier district. Of course I'm not unsympathetic to this claim: surely with all other things being equal, spending more money wisely should allow improvements vs not spending the money. However, if you've been reading my blog, you know that I don't believe this dependence is absolute: many private and charter schools are successful with much smaller budgets than our traditional schools. I also believe we have put way too much effort into finding ways to spend money on new programs, rather than finding ways to improve our district's cost-effectiveness in educational delivery.  In any case, we need to face the fact that we may not have the money in the long term. Spending for today without regard for the future will just make it more painful a few years from now, when we have to face a massive cut to fill in the shortfall. I think many members of our community are growing cynical of the district for creating these kinds of situations on purpose-- that's one major reason the recent bond initiative failed. The best way for HSD to gain the public's confidence in its financial management is to refuse to particpate in the bureaucratic government tradition of continually increasing spending, to maximize the size of the "shortfall" caused by future expenses or general losses, and then demanding more money to compensate.

The other major argument  was that this year's money is there for this year's kids, and we are somehow cheating them if we don't spend it directly on them. If we had a pay-as-you-go system where every student was specifically paying their own tuition each year, this argument might hold water. But the entire public education system is based on redistribution: retirees, childless singles, local businesses, and others all pay tax money that is used to educate the majority of children, in theory serving the common good.  If we can redistribute across populations for the common good, why can't we distribute across time for the common good as well? If we can provide the best education to the most children in the long term by saving money this year, how can that be considered immoral? Aside from that basic observation, the truth is that we already are dealing with plenty of expenditures whose costs and benefits are unevenly distributed across time: long-term planning, investing in new equipment, building mainenance, and of course the notorious PERS, an insanely expensive burden foisted on us by our predecessors. So the argument that we are somehow morally bound to fully expend each year's budget, rather than prudently banking money when we see a huge expense looming, simply doesn't make sense.

So, in short, it seemed to me that our budget should include direct consideration of how we will cover for the looming PERS shortfall created by the Supreme Court decision, even though we technically are not forced to pay for it yet. As I mentioned above, it looks like we will have more money than expected, so perhaps this will become less of a concern. But be sure to watch how HSD is planning its spending, and pay close attention to how much (or how little) is being done to reduce long-term costs. When tax debates or ballot initiatives come up, do not reward the school district for overspending to maximize future "shortfalls": reward it for prudent actions taken to save money and reduce long-term expenses. Remember a fundamental rule of economics: we will almost always get more of the behaviors we reward.

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