South Orange – Maplewood
School District
2007-08 Budget Development
November 20, 2006
2007-08 Budget
Continuing Impact of S1701 on
Budget Management and Preparation
S1701 was a major change in the school funding formula
intended to limit school spending. It was passed in June 2003
by the Legislature in a rushed manner with little discussion
and no opportunity for public comment.
[Commissioner Guidance for preparation of the 2007-08 Budget is not yet available]
November 20, 2006
2007-08 Budget Development
2
S1701
Legislative Intent:
Educational Impact:
Short-term property tax
relief
Constraints on funding a
quality education
Greater accountability to
the local voters
Continuing cuts in the face
of cost increases out of
local district control
November 20, 2006
2007-08 Budget Development
3
The Rules Changed: S1701
Limit on CAP
Change in use of CAP adjustments
Restrictions on use of Separate Proposal(s)
Limits on administrative costs
Limits on allowable free balance
Restrictions on use of free balance
Restrictions on transfers within budget
accounts
November 20, 2006
2007-08 Budget Development
4
 Limit on CAP
• CAP is the limit on the amount of money that
can be raised to fund the school budget.
• Allowable increase tightened from a maximum
of 3% to a maximum of 2.5% or CPI,
whichever is greater
• CPI was 4.04% for the 2006-07 budget
November 20, 2006
2007-08 Budget Development
5
Limit on CAP: What it means to
SOMSD:
• The maximum permitted net budget for 2007-08 is estimated to be about
$91.2 million.
• This amount is $3.2 million (4%) more than the current budget.
• School district budgets across the state have historically risen at much
greater rates – just to maintain the existing level of programs and services.
• In the recent past, SOMSD budgets have grown from 4% to 8%:
– 2002-03
$3,434,526
(5%)
– 2003-04
$4,482,947
(6.5%)
– 2004-05
$6,071,327
(8%)
– 2005-06
$3,292,446
(4%)
– 2006-07
$5,251,810
(6%)
• These increases are in line with other districts: our spending per pupil
November 20, 2006
Budget Development
continues to be below the2007-08
state average.
6
Expenditures would have to increase more than
the allowed $3.2 million just to maintain the
current level of programs and services.
Major cost drivers expected to increase more than 4%:
• SOMEA negotiations underway.
• Industry trends for health benefit increases range
from 12% to 19%.
• Insurance and fuel are expected to increase in the
double digits.
• Building maintenance costs continue to rise given the
age of our buildings.
November 20, 2006
2007-08 Budget Development
7
Illustration: Stringent CAP limits create
shortfall in revenues needed to maintain
existing programs/services:
potential $ inc.
SOMEA 2006-07 salaries: $44,100,000
Assume increase if SOMEA
settlement is 4.4%
Health benefits: $8,800,000
Assume 15% increase
(industry trends range 12% -19%)
Allowable budget increase at 4% CAP:
Shortfall in allowable revenue ( CAP):
$ 1,940,608
$ 1,320,000
$ 3,260,608
$ 3,237,055
$
23,553
(before addressing increases of other cost drivers such as fuel and insurance)
November 20, 2006
2007-08 Budget Development
8
 Change in use of CAP adjustments:
• Statutory Growth Limitation Adjustments
allow increases to CAP for certain cost drivers.
–
–
–
–
Changes in enrollment
Capital outlay expenditures
Pupil Transportation
Incremental increase in special education costs in
excess of $40,000
– Costs for opening a new school facility
November 20, 2006
2007-08 Budget Development
9
New calculation for the transportation
adjustment:
• Prior adjustment provided prorated share of the
cost of transporting non-remote riders.
• New calculation is the incremental increase
between 06-07 cost and the 07-08 cost
adjusted by the CPI.
November 20, 2006
2007-08 Budget Development
10
Change in Use of SGLAs:
What it means to SOMSD:
• Use of SGLAs increases spending authority, not the
amount of state aid.
• For example, 2006-07 SGLAs increased CAP $1.4
million, reducing the amount cut to stay under CAP
• It is not likely that significant use of SGLAs will be
available in the 2007-08 budget.
• The pupil transportation SGLA no longer allows an
adjustment to cover cost increases for MarshallJefferson pairing or Seth Boyden Demonstration
School.
November 20, 2006
2007-08 Budget Development
11
 Restrictions on Use of Separate
Proposal for Expenditures above CAP
• Cannot be used to fund any program or service that
was part of the previous year’s budget.
• Cannot be used to fund any new programs or services
that are needed to meet the Core Curriculum Content
Standards.
• District must demonstrate that all potential
efficiencies in administrative operations are in effect.
• County Superintendent can reject if the district’s
administrative costs are too high in his/her opinion.
November 20, 2006
2007-08 Budget Development
12
Restrictions on Use of Separate
Proposal: What it means to SOMSD:
• Separate proposals have been used in past
budgets to provide a range of non-T&E items
that would not fit under the CAP.
• Items totaling $900,000 were funded by
separate proposal in 2006-07 budget. Included
were 9.5 FTEs for programs and services.
• Final decision-making assigned to county-state
administrators even if locally supported.
November 20, 2006
2007-08 Budget Development
13
 Limits on Administrative Costs
• CAP within a CAP
• Per pupil costs for 2005-06 could not exceed the lower of:
– the 2004-05 costs, adjusted by the CPI, OR
– the regional administrative “amount”.
• Beginning in 2006-07, administrative spending is further
restricted: it could not exceed the 2005-06 amount.
Commissioner can approve an increase not to exceed the
inflation factor.
• Does not matter if district administrative costs are lower than
the regional “amount”.
• County Superintendent may reject the entire budget if costs are
too high in his/her opinion.
November 20, 2006
2007-08 Budget Development
14
Administrative costs include much
more than administrator salaries.
General Administration:
• BOE expenses, elections, negotiations, meeting expenses,
legal advice, auditing services.
• Salaries and benefits, supplies and materials for
Superintendent’s Office, community relations, state/federal
relations.
• District-wide costs for telephone, communications, postage,
legal ads, liability and fidelity insurance.
November 20, 2006
2007-08 Budget Development
15
Administrative costs (cont.)
School Administration:
• Salaries and benefits for principals, assistant principals, other
assistants, clerical staff.
• Salaries and benefits for directors of guidance, athletics, and
special education
• Supplies, postage, printing, copiers, paper, furniture and
lockers, professional subscriptions and memberships, etc.
November 20, 2006
2007-08 Budget Development
16
Administrative costs (cont.)
Central Services
• Salaries and benefits, supplies, postage, furniture,
memberships and other expenses of the business office and
human resources
• Fiscal services including purchasing, budgeting, financial and
property accounting, payroll, funds management, inventory
control
• Human resources recruitment, placement, maintaining
personnel information
• Strategic planning including conducting and managing
programs, research, development and evaluation.
November 20, 2006
2007-08 Budget Development
17
Administrative costs (cont.)
Information Technology
• Salaries and benefits to support administrative networks,
maintaining administrative information systems and
processing data for administrative and managerial purposes.
• Includes hardware maintenance and repair, licensing, support
personnel, etc.
November 20, 2006
2007-08 Budget Development
18
Limits on Administrative Costs:
What it means to SOMSD:
• Administrative costs budgeted for 2006-07 were
$8,156,460 -- less than 10% of budget.
• BOE held increases in all administrative salaries to
2.5% through 2006-07.
• Salaries and benefits make up about $6.5 million
(80%) of administrative costs.
• $1,294 per pupil cost well below regional average of
$1,603 per pupil.
• No increase allowed for 2007-08.
November 20, 2006
2007-08 Budget Development
19
Limits on Administrative Costs: What
it means to SOMSD (cont):
Restrictions on administrative costs do not take into
account growing demands on administrative time,
including increased:
• Need for attention to individual student to improve
educational achievement.
• Assessments, record-keeping and reporting demanded
by NCLB and other federal/state mandates
• Supervision, observation, evaluation, support and
mentoring of new teaching staff.
November 20, 2006
2007-08 Budget Development
20
 Limits on Allowable Free Balance
• Any amount in excess of 3% of expenditures
returned to taxpayers in 2004-05.
• Any amount in excess of 2% of expenditures returned to taxpayers in 2005-06.
• Excess amount used for property tax relief.
• The excess determination is made twice, once
during budget development and again during
the annual audit.
November 20, 2006
2007-08 Budget Development
21
Limits on Allowable Free Balance:
What it means to SOMSD:
•
•
•
•
$575,000 -- returned to taxpayers in 2004-05
$800,000 – returned to taxpayers in 2005-06
$635.000 – returned to taxpayers in 2006-07
$1,250,000 has been reserved and will be budgeted
toward reducing taxes in the 2007-08 budget.
• The maximum unreserved free balance allowable
after the 2005-06 audit is $891,747.
• This will bring the unreserved fund balance to 1.11%
of the 2005-06 expenditures.
November 20, 2006
2007-08 Budget Development
22
Limits on Allowable Free Balance:
What it means to SOMSD:
• Free balance is a contingency fund for
unanticipated expenses.
• Board policy has always sought to maintain a
minimum amount equal to 3% of expenditures
to deal with the unexpected without creating
fiscal shocks to the district.
• An amount between 3% and 6% is considered
prudent fiscal management.
November 20, 2006
2007-08 Budget Development
23
Limits on Allowable Free Balance:
What it means to SOMSD:
• Potential lack of sufficient funds for
unanticipated expenses during the school year.
• Further loss of local control.
• Possible reduction in credit rating resulting in
higher interest costs at a time when bonding
for major capital projects is needed.
• Short-term tax relief may result in a spike in
property taxes beyond 2007-08.
November 20, 2006
2007-08 Budget Development
24
 Restrictions on Use of Free Balance
• Transfers from free balance can only be made
between April 1 and June 30.
• Use of free balance requires the approval of
the Commissioner of Education.
November 20, 2006
2007-08 Budget Development
25
What it means to SOMSD:
• Restricts the ability to pay for emergencies and
unanticipated expenses as school year progresses.
• In 2002-03, $911,000 transferred to cover:
unanticipated legal settlements, energy costs and
snow removal, insurance, repairs due to frozen pipes,
ceiling collapse and compressor control replacement.
• In 2003-04, $500,000 transferred to cover: energy
costs due to severe weather, unanticipated increases
in out-of-district tuition, flooding and roof repair.
• Further loss of local control and flexibility.
November 20, 2006
2007-08 Budget Development
26
 Restrictions on Transfers
• Transfers within budget accounts must be under 10%.
• Requires 2/3 approval of BOE members for
cumulative transfers of more than 10%.
• Also requires County Superintendent and Regional
Assistant Commissioner approval for cumulative
transfers of more than 10%.
• Additional reporting requirement -- status of transfers
reported monthly to the County Superintendent.
November 20, 2006
2007-08 Budget Development
27
Restrictions on Transfers:
What it means to SOMSD:
• Curtails flexibility and restricts the ability to manage
adjustments as the year progresses.
• Requires pin-point budgeting 6-15 months in advance.
• Adversely impacts use of the budget as a rational planning and
management document. Budget is based upon projections and
assumptions regarding enrollment, staffing levels, fixed cost
increases, student needs, building repairs and other item costs
that can fluctuate dramatically.
• Concerns that the County/State administrative staffing may not
be adequate for timely review and approval.
• Further loss of local control.
November 20, 2006
2007-08 Budget Development
28
SUMMARY: IMPACT OF S1701
• Programs and services have already been reduced to
contain budget increases in previous budget.
• Pressures district to make drastic reductions in
programs and services.
• Does not take into account the additional
responsibilities – and costs -- to serve a diverse
population and maintain integrated schools.
• Likely to affect the wage rates we are able to pay
and/or the class size we are able to sustain.
• Loss of local control; final decision-making with state
administrators.
November 20, 2006
2007-08 Budget Development
29
SUMMARY: IMPACT OF S1701
• Makes school spending the scapegoat for high
property taxes when the real issue is New
Jersey’s over-reliance on the property tax to
fund schools.
• Schools have not received increased state aid
for more than 5 years.
• Implies that the solution to high property taxes
is reduced school spending when the real
answer is the need for full funding for all state
and federal mandates imposed on schools.
November 20, 2006
2007-08 Budget Development
30
Three-Year Budget Projections:
2007-08, 2008-09, 2009-10
November 20, 2006
Projection Caveats
• The following are projections. They are not
predictions nor forecasts; The outcomes only hold
true as long as the assumptions remain true.
• Key cost assumptions are based on the best available
information and will change as more information
becomes available.
• The projections for the upcoming 2007-08 budget do
not constitute a budget proposal but merely illustrate
a range of resource cuts that might be necessary in the
face of external constraints.
November 20, 2006
2007-08 Budget Development
32
Projections are a planning tool.
• What expenditure increases would be
necessary to maintain the current level of
programs and services?
• What would be the tax impact?
• What level of dollar cuts would likely be
necessary from this “maintenance” level to
comply with S1701?
November 20, 2006
2007-08 Budget Development
33
Standard Modeling Approach Used.
• Determined “maintenance” budget required to
continue current programs and service levels.
• Considered impact of various alternate resource costs
and levels on expenditure totals using the key
variable of salaries.
• Considered impact if expenditures were held to 4%
CAP as likely will be required under S1701.
• Compared annual rate of expenditure increase.
• Compared estimated General Fund tax burden and
annual rate of tax increase
November 20, 2006
2007-08 Budget Development
34
Key Assumptions for Revenue
• Formula state aid is likely to remain constant - about
$5 million for the general fund.
• S1701 requires appropriation of unreserved fund
balance to reduce taxes. $1,250,623 has been
reserved for that purpose.
• Miscellaneous revenues include interest earned on
investments and rentals for use of facilities.
• Local taxes comprise the balance of budget revenues.
November 20, 2006
2007-08 Budget Development
35
Key Assumptions on Revenue (Cont)
• Fund balance only reduces taxes, it is not
available to increase spending.
• Restricted federal funding and state
entitlements are not included in this discussion
since they do not contribute to the general
fund.
• Taxes for debt service are included in the tax
impact projections to provide a total picture of
taxes required.
November 20, 2006
2007-08 Budget Development
36
Key Assumptions for Expenditures
• Inflation factor of 4% for most categories
including supplies, materials, texts.
• Key cost drivers inflating at a more rapid rate:
–
–
–
–
–
Health benefits, +15%
Out-of-district tuition, +15%
Legal costs/judgments, +10%
General insurance, +15%
Utilities, +20%
November 20, 2006
2007-08 Budget Development
37
Salaries and Benefits Comprising Nearly
80% of the Budget Are Key Variable.
• SOMEA contract expired 6/30/2005.
• Cost of increment at current staffing levels /
guides:
2006-07
2007-08
2008-09
2.60%
2.75%
2.46%
• Projected impact of settlement: 4.44%
November 20, 2006
2007-08 Budget Development
38
Salaries and Benefits Comprising Nearly
80% of the Budget Are Key Variable.
• ASCA contract expires June 30, 2007.
• Projected rate of increase
2007-08
2008-09
3% (assumed)
3% (assumed)
2009-10
3% (assumed)
• Central Office salaries are negotiated annually.
Projected to follow ASCA increases of 3.0% in
each of the three years.
November 20, 2006
2007-08 Budget Development
39
Additional Cautions and Caveats.
• Some cost assumptions may not hold true;
actual budget expenditures needed for the
various levels of resourcing might be higher
than illustrated.
• Existing level of state aid is, as always, at risk.
• Projected cost of building maintenance may
increase pending capital projects.
November 20, 2006
2007-08 Budget Development
40
Maintain current programs and services
(budget amounts in millions)
General Fund
2007-08
“Maintenance” budget
Expenditure increase rate
Taxes ($)
Taxes (%) increase
November 20, 2006
2008-09
2009-10
$94.8
$101.4
$108.9
7.73%
6.97%
7.44%
$91.2
$94.9
$98.7
7.02%
8.60%
7.60%
2007-08 Budget Development
41
Spending held to 4% CAP
(budget amounts in millions)
General Fund
2007-08
2008-09
2009-10
Expenditures held to CAP
$91.2
$94.9
$98.7
Expenditure reduction from
“maintenance” budget
($3.5)
($6.5)
($10.2)
Expenditure increase rate
3.71%
4.02%
4.02%
Taxes (%) increase
2.87%
5.60%
4.12%
November 20, 2006
2007-08 Budget Development
42
Review of Prior Year Cuts:
Budget Year
Reduction from
“Maintenance”
2000-01
$1,527,833
Positions
Eliminated
as a Result
5.6 FTEs
2001-02
$1,502,414
8 FTEs
2002-03
$2,956,882
18 FTEs
2003-04
$2,564,617
16 FTEs
2004-05
$2,389,765
24 FTEs
2005-06
$3,150,204
34.7 FTEs
2006-07
2007-08 Budget Development
$3,213,638
November 20, 2006
97 FTEs
43
Baseline Data for Building the Budget
• District Goals, Budget Priorities
• 2006 CAFR (audit) including MD&A (management
report) presented Dec 4 by auditor
• General Fund free balance status report as of June 30
• Enrollment projections by professional demographer
• Low income students report
• Transported students report (DRTRS)
• Average employee salaries including benefits
• Required maintenance schedule
November 20, 2006
2007-08 Budget Development
44
Summary
• Again, we face a major challenge in balancing the need to
limit the district’s spending against the need to maintain a
viable offering of programs and services.
• Operational efficiencies and program realignments continue to
be sought although many have already been addressed in
previous budgets.
• Spending constraints required by S1701and proposed
legislation will likely require repeated cuts in resource levels,
principally staff and administration FTEs.
• Budget Priorities will guide the budget development process.
November 20, 2006
2007-08 Budget Development
45
Next Steps in Budget Development
• These projections are intended to assist decisionmakers in understanding the impact of S1701 on
various budget decisions.
• Actual budget expenditures will be further developed
considering multiple inputs including:
– Building on baseline data
– Continued cost analysis
– Input from stakeholders on actual needs of district
• The Preliminary Budget will be presented to the BOE
by the Superintendent on January 22.
November 20, 2006
2007-08 Budget Development
46