The Consequence of Responsibility

When I arrived in 2010, this district was in trouble financially. At the end of that first fiscal year, we had an unspent balance of just $90,971. Without context, that may seem to be a pretty meaningless number so let me try and fill in the blanks. The trouble is, when trying to estimate the balance sheets leading up to the close out of the fiscal year, it is part science and part art. I usually give the board a target number with the caveat that we'll be within $100,000 on either side of the target. So then, ending with $90,971 on the right side of the ledger that first year was lucky; and essentially a rounding error. Needless to say, we had to implement some pretty austere budget reductions in order to right the ship. That meant reductions in force, elimination of some programs, and the consolidation of others. I'll always remember those public meetings in the middle school auditorium, and of course a board meeting the following August when we had kindergarten parents stacked like cordwood in the boardroom when we had two sections of kindergarten: 29 and 28 students in each. It was not great, but we had no choice and had to hold the line.

You see, in Iowa it is illegal to overspend the maximum authorized budget. To be clear though, I am not talking about deficit spending. Deficit spending in a fiscal year simply means the district has dipped into their reserves, or unspent authorized balance. Every once in a while deficit spending isn't a problem, so long as the decision maker is aware that each year of deficit spending will result in the deterioration of unspent balance. Exhausting all of your spending authority is a big deal. It can lead to an automatic reduction an equal amount the following year, a state mandated 'work out' plan, and a Phase II fiscal review under the administration of the Iowa Department of Education. But the ultimate penalty is loss of accreditation, which effectively dissolves the school district. Has it happened before? You better believe it, and not all that long ago. In 2018 the Davenport Community School District was placed under state oversight because of financial problems. In fact, they just regained local control in 2022. More recently, the Orient-Macksburg school district will officially dissolve on July 1, 2026. 

I have argued, and will continue to do so until the day I retire that the single most important financial metric in Iowa public schools is the unspent balance ratio. If it goes sideways, it is the only one that can close you down. That, coupled with the challenges we had at the beginning of my tenure have made made me, well....particularly sensitive to this metric. That is why we have been so careful and diligent in our budgeting practice and execution. That is why we file for ever class action that we can in order to preserve and recapture any spending authority that we are authorized to under Iowa law. I am proud to say that we are on track to close fiscal year 2026 with an unspent balance approaching $6.2 million (+/-$100,000). At the same time we have been able to fund and add programs, provide fair compensation to our employees, and ensure that our facilities are well maintained and cared for. We've done so through a disciplined approach and responsible stewardship of our taxpayer resources. Unfortunately it appears some of that hard work is in jeopardy. 

And not because of anything we have done. It is because the lastest property tax proposal from the House will limit the unspent authorized budget carry forward for the next budget year to no more than 35% of the prior year expenditures. Now, for perspective this is what I anticipate the next five years of UAB will look like: 

This is what happens when the formula is changed: 

Granted, this is all based on projections and A LOT can happen in the interim.  But these are our known variables at this time, and mathematically defendable. If this change were implemented, the sum loss of spending authority over the next five years in Hudson Schools could exceed $9.8 million. Now, part of the argument that is being made is that school districts are sitting on too much unspent balance. Perhaps that argument has some merit. If it does the follow up question must be, who should be the arbiter of how much is too much? The fact is that the only way to drive this metric down would be to either not claim authority that is allowed by statute (which, frankly I would view as irresponsible), or to increase expenditures. We can increase expenditures. But that would seems counterproductive, seeing that the whole point is to lower property taxes. To me, it seems wholly appropriate to carry a large reserve fund simply because of all the volatility we are experiencing-from quite literally everywhere! It is an insurance policy meant to combat those years when deficit spending may be necessary, or to deal with a sudden drop in enrollment caused by changes in state law or economic stagnation and recession.

If the idea is property tax reform, I think there may be a disconnect. You see, not all of that unspent balance is backed by cash and can't be. In our case, we are only backfilling about $900,000 of our authority with cash in order to maintain our solvency ratio. We could fund more, but are not, precisely because of property tax sensitivity. Even so, there is already a circuit breaker in place to limit the levy. Our ability to generate revenue is limited to 20% of the total general fund expenditures from two years ago. Now, that has created some other problems that are unique to a school district that has experienced rapid growth over the last two years, but we have been able to manage. The point is, we couldn't fully fund the unspent balance if we wanted to because we have one hand tied behind our backs with the statutory limitations currently in place. Throttling back a districts ability to capture spending authority then, will not impact property taxes-because the statutory governor placed on the cash reserve levy already does that.

What it will do though is further erode a school districts ability to respond to unplanned anomalies, which are becoming more and more common in this era of volatile enrollment swings-also due to recent legislative changes. I don't know. It kind of feels like we are being punished for being responsible.