Looking Around the Corner

It's that time of year. The legislature is in session and budget season is upon us. I'll be spending time in this space over the coming months explaining the various proposals that are being discussed in Des Moines and how they may impact Hudson Schools. To this point, we are relatively early in the session and as such there really are no surprises. Supplemental state aid is not yet set, but the governor recommended a 2% increase, which is what I have presumed in my forecast models. Property tax reform is a key priority this year, and while the proposals that have been filed so far are concerning, there will be ample time to unpack those as we get into the session. To begin, I want to spend a bit of time with you today discussing the budget and providing a bit of context into the conversations that are happening with some of our neighbors around the state as they consider what can best be described as austere budget cuts.  

In September, I shared with you our financial report on the current status of district finances with a promise to return to this topic with a forecast toward the end of October. That forecast was completed, but some of the assumptions needed additional refining. It wasn't until we had our property valuations complete and a sense of SSA recommendations before I had a moderate to high degree of confidence in the accuracy of these models. A disclaimer: when forecasting 5 years into the future it is very difficult to have a high degree of confidence in anything. I prefer a closer view; about 18 months. Even so, this is a great exercise to at least provide a roadmap. We'll get to that in a moment, but first...

If you have been following the local news, they have been running a series of stories regarding a roughly $11 million hole that needs to be filled in Cedar Rapids. The District explains the primary reason is due to the introduction of vouchers that came fully online this school year. As such, they have seen a precipitous drop in student enrollment. The governor, when interviewed, pointed to the use of covid money (AKA one time money) being used for ongoing or operating expenses. Truth be told, they are both right-with the edge probably going to the decrease in enrollment. 

First, the enrollment drop. In the simplest of terms, revenue for a school district is generated by the number of students served multiplied by the cost per pupil. If you have fewer students each succeeding year, less revenue will be generated. It is incumbent on schools then, to adjust expenditures accordingly. Granted, this is much easier said than done because the byproduct is most certainly going to be larger class sizes (and in the case of Cedar Rapids building closures). From a purely analytical and mathematic(s) standpoint it is pretty easy. From an emotional standpoint, it is much more difficult. 

The idea of covid money being one time money is also valid. Consider this scenario. You are gifted $500 and all you have is $500. You use that 'one time' money to finance a new car. The first month, the payment is $100, leaving you with $400. After 5 months, that money is gone and you no longer have a way to make the car payment. What do you do? Well, for starters you probably shouldn't have bought the car. Some school districts used this same principle with their covid allocations. They hired teachers and then when the money ran out, they retained them on staff. You can see the issue, right?

This is why it is so important to have the ability to 'look around the corner' and see what is on the horizon. If one time money is used for operational expenditures, what is the plan for when that funding stream dries up? How do we account for fluctuations in enrollment? Changes to state funding? If we change variable 'X', then what? How are property taxes impacted? Our ability to forecast is critical, not only to keep us out of budget trouble, but to help make long term plans for the district. These models are updated on a regular basis as new information is gathered. So, what does our forecast tell us? Well, based on the current assumptions, mostly sunny with a few clouds here and there. 

Here is what one model assumes. In this scenario, for FY27, general fund expenditures would grow by 5.33% from $12.092 million to $12.737 million, and then flatten to a growth rate of 4% for the run of the model. (If these expenditure forecasts seem high, keep in mind with projected enrollment growth there is also a need for additional staff to serve those students.) It also suggests a tax rate increase over the next 3 years in effort to keep the solvency ratio in the 15%-20% range. It also illustrates a property tax rate [relief] that would be realized if we were able to capture the valuation from our TIF district. This is quite a striking number! It also shows that our unspent balance remains healthy (which I continue to preach is the most important metric in Iowa School Finance), and it portrays a very healthy ending fund balance, increasing every year through the run of the model, with a decrease of $172,117 in FY31. 

The chart above, as stated in the title shows results in the simplest of terms. The blue bars along the 'X' axis illustrate the revenue generated to fund the program whereas the line that follows along the 'Y' axis is an illustration of the spending trajectory. Actual spending is shown through FY25, and then it forecasts four different scenarios ranging from a 3% growth pattern to a 6% growth pattern. If the line is touching the bar, the district has matched or underspent when compared to the resources. On the other hand, if there is a gap between the line and the bar, it suggests a deficit spending scenario. In this model, projections fall somewhere between the purple and green lines. 

In the final analysis, these projections should be consumed for what they are worth: they are assumptions. They answer the 'If, then', question. Forecasting what the budget is going to look like in FY31 is merely an academic exercise at this point. What I really try to hang my hat on at the end of the day is what is the end of this fiscal year going to look like, and what is the end of the next fiscal year going to look like.

At this point, these aren't even budget recommendations. That will come a bit later on in our budget season (and for FY27 only). Ultimately the school board will determine which variables make the most sense for our school district and what the actual 'spend' will look like. Not only that, but we have a lot of legislative session to get through yet, and property tax reform will be addressed this session. 

As our title today indiates, we are looking around the corner with an exercise like this. Granted, I'm only really focused the base year and out year. This type of financial tool at least gives us a jumping off point and ample runway if adjustments are needed in the future (and with every variable that changes in the model, adjustments are needed). A look like this provides us the gift of time and planning. 

However, time isn't on our side for all things when 'looking around the corner'. Currently, we are in the process of triangulating our enrollment projections with building utilization. For that exercise, we are looking all the way to 2034-2035 school year. By that school year, if enrollment continues to track as currently projected, we would have 4 sections per grade level K-12. Can we fit them all? Well, that is the question we are currently trying to answer. That one, well we don't have as much time. Stay tuned, we'll tackle that topic in an upcoming article!