Budget Goals
I don't like the way the board sets budget goals. This is an essay on how the district counts our money. It's not my most exciting writing, but it's fundamentally concerned with how our taxes get raised. Even if you don't read the whole thing, you might want to scroll down for some informative charts. They're interactive so you can hover over the various elements for more information.
Let's start with the main budget goal for FY15, the current school year:
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| FY15 budget goal from the September 18, 2013 minutes |
First what's good about this. The board is constraining budget increases to not exceed the inflation rate (usually around 2%), in other words, zero real growth. This is an ambitious goal for a number of reasons. In New Hampshire, nominal cost per pupil grows much faster than the inflation rate, often a few percent more annually. So the cost-of-living constraint is a reduction relative to the state average. Also, given tuition students and a surge of new kids in the district, our enrollment is rising, but we are not allowing ourselves to spend more money to accommodate the new students. This essentially forces a further reduction per pupil equal to the rate of increase of the student population. This is all good news for the taxpayer.
I've been making public comments at board meetings for a while about what I think is bad about goals of this form. I have three main objections. The first is that I don't believe the "not subject to COLA" exceptions should be included. Negotiating contracts are a big part of the board's work, and this clause allows them to shrug off a poor job. Dealing with external things like health insurance costs and shifting state support is a big part of budgeting -- when you get a shock in one item you have to find the money somewhere else. The time for the mealy-mouthed language is after the bad thing happens -- you can use it to explain to taxpayers why you didn't meet your simple, ambitious, clearly articulated goal. The board has been happy to reap the rewards of unexpectedly low health insurance costs, so no fair punting the hikes.
My next two objections are about the word "Budget." First, it's not clear what exactly this means. (The most likely contenders are the operating budget and the total appropriations.) Second, it's the wrong goal to measure as it doesn't reflect important sources of revenue under board control, mainly tuition income and fund balance (previous year's unspent money). Most of the rest of this essay covers this in detail while developing an alternate budget metric.
Here's the goal approved for FY16, the next school year. It governs the work on the budget currently being developed.
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| FY16 Budget goal from the September 3, 2014 minutes |
This is an improvement over the FY15 goal in an important way: it makes it clear that it's a constraint on the operating budget. On the face of it, it's also an improvement because it reduces the exceptions -- health insurance and negotiated contracts are no longer excepted. But it still excludes the increases from negotiated contracts as those need to be approved as separate warrant articles. I guess we're counting health insurance as an expense this round. (The health insurance budget line has acted like a stealth reserve fund in recent years, but I'm not going to get into that here.)
This also got worse in some ways. I don't want to focus on the size of the increase in this essay, but I'll mention 3% is larger than an inflation cap, which would be around 1.8%, and that the difference is almost exactly the amount of found money from the LGC settlement which the district spent on Moh Café.
I'm not too fond of the preamble, which is a bunch of excuses about the increase. I don't mind a rationale, but separate it from the actual goal. It's a bit disingenuous too, given that by excluding warrant articles they excepted the negotiation increases and true capital expenses would be outside the operating budget (I think they're mostly talking about maintenance, which is an operating expense). Actually the exception is even worse than it looks, because the district is probably excepting those items as costs this year, but comparing the total to the un-excepted budget of the previous year.
How Are Budget Increases Measured?
The real problem is the quantity being measured doesn't measure a few big ticket items that the board controls. From what I can tell, this year the figure of merit is
increase = (FY16_operating_budget - state_shifts - negotiated_increases) / FY15_op_budget - 1
The goal is to keep this increase under 0.03. Each of the subtracted terms will only be included if it makes the increase smaller, which is icky in my book.
Instead of subtracting costs from the total budget to obtain a figure of merit, it makes much more sense to subtract non-tax revenue, as those go to lower taxes, just like spending less. Instead of using the operating budget, it makes sense to use total recommended appropriation, which includes all board recommended warrant articles (especially including negotiated contract increases). And it certainly make sense to compare the figure to the comparable figure the previous year, instead of a different figure that results in a smaller perceived increase.
I'm not writing a mystery, so I'll tell you now that the form I prefer is
CostToGov = total_recommended_appropriations - total_school_revenue
increase = CostToGov_this_year / CostToGov_previous_year - 1
I called it CostToGov (cost to government) as it represents the amount that will be covered by federal grants, state taxes and grants, and local property taxes. We'll get into exactly what's included in total_school_revenue below, where I call this metric TotA-Sc-FB-Xf. Let's explore various budget metrics to see how I arrived at this one.
Options for Budget Metrics
The operating budget (fund 10) represents all the money needed to operate the school for a year. I think there's a bit of difference between what the ms-26 calls the operating budget, as that includes transfers to other funds to fund things like food service (which also gets revenue from meal charges and from the feds). Those amounts stay pretty constant so I'm not going to worry about the difference too much. Since the district is excluding recommended warrant articles in their goal, the increase as a result of negotiated contracts is not counted.
The total recommended appropriation is the operating budget, plus the first year amounts on any warrant articles recommended by the board. I think it is a better metric than the operating budget because the additional warrant articles that are approved by the board will end up taking real money out of taxpayers' pockets so should be counted.
However, just focusing on the expense side of the budget leaves out important board work that affects taxes. The problem is particularly acute given the increase in tuitioning. We've reached the point where more tuition students means hiring more teachers. This causes an increase in the operating budget to pay their salaries and benefits. We're told this increase is more than offset by increased tuition revenue to the district. But the spending metrics, like operating budget or total appropriations, do not include the beneficial effect on taxes of taking in tuition revenue. Thus, under the pure spending metrics, taking tuition students is a bad idea, as it increases spending. But in fact it's a good idea, as revenue received substantially exceeds expenses incurred, thus lowering the tax burden on us locals. Our metric must reflect this.
Historically, the board appropriates a bit more money than it needs every year. The amount left unspent at year end is called the fund balance. It's returned to the taxpayers every year, lessening next year's taxes. (Now at board discretion it can also be transferred to the reserve fund.) The district keeps pretty good tabs on the expected fund balance. Lately the board has been spending much of the leftover money instead of using it to lower next year's taxes. My contention is that this is because the budget metric we use does not penalize this behavior, or reward a large fund balance used to lower taxes.
There are other revenue sources besides tuition and fund balance, though those are the big ticket items pretty directly under board control. Locally, we also have food service sales, investment earnings and transportation fees.
There are also state and federal grants as a revenue source. (This is different than the state tax portion allocated to the district.) These tend to be largely out of district control so I leave them out of total_school_revenue.
It's my contention that what taxpayers are most concerned with in the school budget is their total tax bill. Since the state portion of the school property tax is out of the district's control, it's the local property tax I consider here.
Possible Budget Metrics
I typed in seven years of MS-26 data, including the one the board signed a couple of days ago. This is the form the district files annually to inform the state about our budget. It's produced along with the budget, so represents information available for use in forming metrics. It's all in this spreadsheet.
Out of the data I made the following five metrics:
- OpBudget: Operating Budget, excludes additional warrant articles
- TotA: Total Appropriation, includes operating budget & recommended warrant articles
- TotA-FB-T: Total Appropriation, less Fund Balance and expected Tuition
- TotA-Sc-FB-Xf: Total Appropriation less School Revenue (includes tuition and food service), fund balance and transfers from other funds.
- LocalTax: The local tax apportioned among the towns
Revenue
Unlike business, accounting for schools tends to focus mainly on costs -- where we're spending money. For our purposes here it's helpful to change our focus and look at the revenue side of the income statement, where our money comes from. (The source of the graphs is my MS-26 spreadsheet.) All the graphs in this essay are in nominal dollars, meaning they're not adjusted for inflation. I typically would adjust for inflation, but inflation's been running at a fairly constant 2% so it doesn't matter that much and this way is simpler for most non-financial folks to understand.
The bulk of the money to run schools, around 2/3 ($27M of $40M), comes from local school property taxes, the big green bars. How this money is apportioned among the towns and eventually the property owners is the subject for another day.
After local tax, the next biggest chunk is Statewide Enhanced Education tax, coming in at $8.4M, around 20% of the budget. The amount is largely out of the hands of the school boards. It appears as a separate line on your tax bill. The state collects it and doles it out among the towns. The amount collected and the amount given back aren't the same -- this is the line having to do with Claremont and donor towns and a bunch of stuff I'm not really clear on that changes every few years.
The remaining 11% or so are a bunch of smaller items we look at in detail in the next graph.
I drew the gridlines here every $400,000. Given our budget is around $40M, each $400,000 is about 1% of the budget.
The big spike in the green line is cut off -- it represents $2M of additional revenue to build the new field ($1.7M bond + $.3M transferred from existing district track funds). The field has its own warrant article. It requires a 60% supermajority of voters to pass. I'm guessing it's unlikely to pass this year. Even if it did, it wouldn't impact taxes much next year -- for some reason the payments are low the first year. (Principal and interest payments would average about 0.5% of the budget for each of the next 10 years.) It does represent $2M of additional spending, so as we will see, it does impact the total appropriation.
Besides the bond, the two revenue lines that change the most are tuition and fund balance. Tuition is what we get from taking other, mostly Barrington students, and you can see that the district has been growing this for a while, even though the formal 10 year plan with Barrington to grow it further doesn't officially start until September. Fund Balance is the unspent money left over at the end of the previous school year, which is essentially rolled over into next year, lowering taxes. The remaining items include other school revenue (mostly food service, investment and transportation income), revenue from federal programs, revenue from state grants (mostly building construction funds) and revenue from transfers from other funds the district has.
I put "non-tax" in quotes because much of these are funded from taxes, just not this year's state and local property tax. Tuition is mostly taxes collected from Barrington folks, fund balance and other funds are mostly from taxes collected in previous years and state and federal grants come from other taxes. The exception is the school revenue, which comes from real business activity (selling food or bus seats).
The district doesn't have that much control over the federal and state grants -- we pretty much have to take what we get. The remaining items are much more under the control of the district. For example, the board decides directly whether to spend the fund balance before the year ends or roll if over into the next year. So when I considered which revenue sources to include in a budget metric, I thought it would be best to include sources that the board controlled and leave out the ones it didn't.
What really matters is how much these various sources of revenue change from year to year. Let's look at that next.
This graph shows the variation in various revenue lines year to year. Some, like Fund Balance Revenue, jump around wildly year to year. Some, like State Grants, stay pretty constant year to year. Tuition goes up every year. Again the FY16 bond bar goes to $2M, but I let it be truncated on the graph.
That ends our tour of the revenue side of the income statement. Now we can look at budget metrics.
Visualizing Budget Metrics
I plotted the five budget metrics mentioned above. The purple line, local tax, uses the right scale ($10M less); the rest use the left.
Ideally what we're looking for in a budget metric is one that tracks local tax closely while only including items controlled by the district. These criteria are in conflict -- the more items you leave out, the more the metric will deviate from local tax. Examining the graph, you can see the orange (TotA-FB-T) and the green (TotA-FB-Sc-Xf) track local tax pretty closely. The orange deviates in FY16 because it includes the spending on the field but not the revenue from the bond and transfers.
Let's look at the percentage change of these metrics. These are possible figures-of-merit the district could use for goals.
The current goal is to keep the operating budget increase below 3% -- that's keeping the FY16 blue bar below 3%. The board's been claiming success, but it looks a bit above 3% by my calculation. I think the difference is the district is excluding $260,000 of cost shifts from the state -- the state has again reduced its contribution to staff retirement plans.
You can see how the green bar (total appropriations less school revenue) track the violet bar, local tax. Usually the local tax is larger in magnitude than TotA-Sc-FB-Xf. This is because, all else being equal, a 1% change in spending creates a 1.5% change in taxes. This leveraging effect is because a given dollar amount is a larger percentage of the $27M local tax than the $40M total budget. The exception is FY15, where a boost in the federal revenue helped lower local taxes.
Discussion
You can see why I chose TotA-FB-Sc-Xf as the best metric -- it captures all the recommended spending, less all the revenue (nominally) under the control of the board. It leaves out state and federal money largely out of the boards hands, but despite that it tends to track local tax pretty closely.
If you define
total_school_revenue = FundBalance + SchoolRevenue + Transfers_and_bonds
then the budget metric becomes the net cost figure:
CostToGov = Total_Recommended_Appropriations - total_school_revenue
One problem with the metric as currently conceived is that it is entirely based on the board's proposed budget as reflected in the MS-26 filing. It does not reflect the outcome of the previous vote, where some of the warrant articles could be voted down or (at the deliberative session) have their amounts amended. So if the taxpayers vote down the $2M field, next year the board would get credit for reducing total appropriations $2M, which doesn't seem quite right. A better scheme would be to compare the proposed budget against the actual passed budget. Most years everything passes so it doesn't make a difference, but next year it might.
The metric as perceived counts transfers from funds as a good thing, as they lower taxes. I wasn't sure whether to count transfers or leave them out. I counted them, which seems only fair as the TotA metrics penalized the board if they recommended adding to the funds in the first place. I lumped the bonds in with the transfers as they're sort of transfers from future years in the way drawing on a fund is a transfer from past years. Since the spending of the bond money on the field is appropriated, it adds to costs, so the bond principal has be subtracted in the metric to accurately reflect the effect on taxes. Probably if the board doesn't recommend a bond (is that even possible?), it won't count in total appropriations (which I'm really using as a shorthand for total recommended appropriations) so we shouldn't count the revenue from the bond in the metric either.
Our operating budget is going to grow as we staff up to take tuition students. If we stick with operating budget as our metric, the implication is tuition students are bad as they increase costs. But, as long as the tuition revenue exceeds the additional expense, tuition students are good for the taxpayer. This reality is accurately reflected in CostToGov.
Concretely, each year we take around 14 more students for $200,000 more revenue annually. This is a good deal for taxpayers as long as we spend less than $200,000 staffing up, ideally much less. Presumably 14 students means about one more teacher, maybe one more para. Say we spend $100,000 to hire them. If we continue to use Operating Budget as our metric, and we want to keep the operating budget increase below inflation, we need to cut that $100,000 somewhere else. Basically, we'd be taking new students but not allowing ourselves to fund their staffing out of the tuition revenue. If things keep going like they have been, the result will be an additional cut of about 0.25% off the budget every year. While this is appealing to me as a taxpayer, it's going to be rough on the schools without making any real sense, and bites deeper as we take more and more students.
In actuality, we seem to be hiring at a much greater rate than that. I need to remind the board that our purpose taking tuition students was to increase choice to all students, so we should make sure new hires have a diverse skill set. Also, for taxpayers sake we need to keep the new hiring way below the tuition increase and start hiring younger, less experienced teachers whom we mentor for the future.
Similarly, the board has been treating the fund balance as free money, spending much of it on a wish list as the year end rolls around. But spending the fund balance this year increases next year's taxes. That reality is not reflected in the Operating Budget metric, but is in CostToGov.
Summary
Currently our budget goal has been to keep the increase in operating budget below inflation or so (3% this year). This is an admirable goal, as school costs generally rise significantly faster than inflation. We allow ourselves some outs so things like negotiation outcomes and decreasing payouts from the state to fund retirements that are shifted to local taxpayers don't count toward the increase.
I argue that
CostToGov = Total_Recommended_Appropriations less Total_School_Revenue
better tracks the school portion of the local property tax we pay, so it makes much more sense as a goal to constrain that to the inflation rate, rather than the operating budget. Total_Recommended_Appropriations includes not only the operating budget (without excuses) but all recommended warrant articles, including new contracts. Total_School_Revenue includes the revenues that are under board control, especially tuition income and last year's fund balance. It excludes state and federal money largely out of the board's hands.
If we don't switch from an OperatingBudget metric to a CostToGov-like metric, it essentially means we will not spend tuition revenue on staff for the increased student load, which doesn't make much sense. Not switching encourages the board to go on a spending spree at year end to make the fund balance as small as possible, as there is no penalty for this, nor is there a reward for saving, leading to a high fund balance which lowers next year's taxes.
I'm going to leave this posted for a while to allow for some comments before I send it as a letter to the board.
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