Budget and Taxes

It's budget season here at Hudson Schools! As is always the case, we'll spend the next couple of months defining, refining, and focusing our priorities for the coming school year. It is always a bit challenging because the budget cycle coincides with the legislative session. Pending policy proposals, the rate at which the state cost per pupil grows, an overhaul of the AEA system, and of course a recommendation from the governor to raise teacher pay make for a more complicated process. However, it is normal to enter the budget cycle with unknown variables. But using historical data coupled with known variables and a bit of common sense enables us to craft responsible and thoughtful spending plans. Even so, I want to spend a bit of time today discussing some preliminary figures and talking with you about tax rates. 

To begin with a bit of background knowledge, our school budget is comprised of eight separate funds that each have statutory purposes, rules of governance, and functions. Those funds are the general fund (operations), activity fund (athletics and fine arts), management fund (property/casualty insurance retiree benefits), SAVE fund (sales tax revenue, used for capital expenditures), PPEL fund (physical plant and equipment levy, used for capital expenditures), capital project fund (the high school renovation and addition), debt service (to pay off the bonds), and finally the nutrition fund (our food service program).

Today we will focus on the general fund, which is the largest fund in our budget. As mentioned above, the general fund is used for operational purposes. It pays the salaries of our employees, the instructional material used in the classrooms, and keeps the lights on. We are anticipating a general fund budget of roughly $11.4 million in fiscal year 2025, which is an increase of 5.5% utilizing 98% of the current year spending authority. The fact we are not budgeting 100% of the current available authority is sound budgeting practice since it first indicates that we are not deficit spending; and second, it has the added benefit of increasing our budget capacity, or spending authority. As I have reminded our community of many times: the most important of all financial metrics is the unspent balance, which is a measure of unspent authority. It is illegal to have negative spending authority and the only remedy for negative or declining spending authority is to cut expenses. We anticipate our unspent authority at the conclusion of the current fiscal year to be approximately $5.1 million. By spending 98% of ongoing authority next year, we can project unspent authority at the conclusion of fiscal year 2025 to be approximately $5.3 million. Good news.

But here is where it gets complicated. Not all that authority is backed by cash. Our fund balance at the end of FY 2023 was $1.9 million, which had dropped from $2.2 million the year before, and it will continue to drop in the coming years unless we take corrective action. It is an interesting phenomenon because on one hand, spending authority is increasing (good!) but on other other hand the fund balance is decreasing (not so good). This is known as a 'solvency ratio' issue and there are multiple measures that can be deployed to counteract a declining solvency ratio. I am proposing we deploy them all. But before discussing the solution, I think it first important to understand the cause.

The primary cause is our special education program. It is common in Iowa for special education programs to operate with a deficit, and ours has. The trouble, is that deficit is increasing. While we don't necessarily have more students in special education, the students we do have require much more intensive services; including specialized schools, equipment, one on one nurses, etc. If the student's educational plan calls for a service, federal law requires that we provide it. Since the per pupil revenue generated by the special education program is far less than the cost of the educational plan[s], it is made up by our cash balance. Secondarily, and ironically enough; increasing residential enrollment is also eroding our solvency ratio. As our enrollment grows, our need for more teachers also increases and when it comes to residential enrollment growth, the funding is delayed. While we are able to capture the spending authority immediately, the cash backing is delayed by a year and that first year infusion falls to the fund balance. By the way, the phrase 'residential enrollment' was used purposely. With our open enrollment students, that funding flows immediately to the district. 

The solution then is twofold. First, we reduce special education expenses. This can be done by simply not replacing one of our teachers who is planning to retire this year. The reduction of this position through attrition will not be easy. The byproduct will undoubtedly mean larger caseloads for our teachers. It will require us to ask harder questions when identifying students for services and developing educational plans. The second is a proposed tax rate increase in an effort to stabilize our cash balance and solvency ratio. Without these corrective actions, we could end up with a negative solvency ratio, which means we wouldn't have enough 'cash on hand' to fund the operation during the summer months (when we typically operate for 90 days without the infusion of cash into the district).

So, that is one of the reasons why the tax rate in Hudson might be higher than that in a neighboring taxing authority. But that is not the only reason. The other reason is the value of the property and the geographic footprint of our district. In a district like Hudson, we rely heavily on residential property owners and have very little commercial or industrial properties. Because of this, and the fact that our district encompasses just 63 square miles, our overall assessed property valuation is lower than most of our neighbors. This means that it takes a greater tax effort to fund the program. Think about it this way: if the overall value of property in Hudson is $278,275,295 (it is) and the applicable tax rate is $5.40 (the uniform levy) would generate somewhere in the vicinity of $1.5 million (without rollbacks). But if the property value is $350,000,000, that same applicable levy rate would generate somewhere in the vicinity of $1.62 million.