Sound financial footing in the short and long term for the Mehlville School District means maintaining operating reserves that range from 10 percent to 15 percent of expenditures, the district’s Finance Committee recently told the Board of Education.
And keeping those fund balance percentages in the double digits over the next three years, the committee told the board, means passing a 40- to 50-cent tax-rate increase within the next 12 months.
Finance Committee member and Ernst & Young CPA Charles Fischer recently outlined to the school board the group’s recommendations to keep Mehlville’s finances strong over the next three years.
A recent projection by Chief Financial Officer Noel Knobloch indicates the district could face significant budget problems by 2013 if it doesn’t take steps to increase revenue or cut expenses.
Specifically, budget shortfalls caused by a combination of stagnant local revenue, a possible $2 million to $3 million drop in state revenue and increased operating expenses will deplete Mehlville’s operating reserves by 2013, the projection shows.
The $100 million fiscal 2011 budget recently approved by the board projects operating reserves to drop from more than $12 million — roughly 15 percent of expenditures — to nearly $11 million — roughly 13 percent — by June 30, 2011.
The Missouri Department of Elementary and Secondary Education requires school districts to maintain an operating fund balance that’s at least 3 percent of total operating fund expenditures. Districts that don’t are placed on the state’s “distressed” schools list.
Without increasing revenues or cutting expenditures, Knobloch’s projection shows a negative operating reserve balance of more than $200,000 at the end of fiscal 2013.
The school board in May approved a contingency plan containing nearly $7 million worth of budget items that could be cut or reduced in the event of shortfalls. However, Superintendent Terry Noble recently noted that the plan “really goes beyond cutting this district to bare bones” because Mehlville already is at the minimum level in staffing and other areas.
The Finance Committee, therefore, believes the district should “strive to maintain a 15-percent operating reserve while not allowing the reserve level to fall below 10 percent,” Fischer told the board June 28.
“Having a 15-percent operating reserve would provide the district the flexibility to overcome short-term financial difficulties without cuts to existing services,” he said. “And keeping the reserves above 10 percent allows the district to keep down borrowing costs and avoid a downgrade to its credit rating, which could have a negative impact on the financing costs of any proposed capital projects …
“Some people may support spending down district reserves into single-digit percentages, or possibly risk dropping below the state’s 3-percent threshold for placement on the distressed schools list. The Finance Committee does not share this view and does not believe that such a significant draw down of the district’s reserves is a prudent course of action.”
Fischer said a 50-cent tax-rate increase within the next 12 months would be needed to have a balanced budget and reserves near 15 percent at the end of fiscal 2013. A 40-cent tax-rate increase would be needed to keep operating reserves above 10 percent and to reach a “close to balanced” budget in three years, he said.
A 20-cent tax-rate increase would put Mehlville’s operating fund balance at the state minimum of 3 percent at the close of fiscal 2013, Fischer said.
The committee’s recommendations are based on projections that assume annual increases in normal operating expenditures, such as fuel and salary step increases for staff, Fischer said.
Board member Michael Ocello said to Fischer, “You brought up a point that I’ve heard others debate before. Some people have said: Well, even if you get down to the 3 percent, you’re still keeping the district going, you’re still moving forward. Even if you get on the distressed list, come up with a plan to get off of it. You sounded like you were very adamantly opposed to that and I was wondering if you might elaborate on that further.”
Fischer replied, “In this economy, with the way the numbers are running, it’s possible to have a very large deficit in a very short time. And so the lower your reserves, the less room there is. At 3 percent, you’re at about $2 million. So obviously you can’t have a $5 million operating deficit. It also means the lower you are, the steeper the cuts have to be to stay above.
“The biggest gaps are on the revenue side, and unfortunately, it takes time for revenue to come in. If you pass a ballot measure, it doesn’t start showing up in the next few weeks. It doesn’t start showing up in the next few months … We talked about a ballot measure in November 2010. That revenue would not be coming in until 2012. So when you’ve got low balances, and you want to plug it with revenue needs, you’ll lose the flexibility.”
While the Finance Committee has recommended Mehlville strengthen its operating reserves, the district recently completed a second round of community engagement for its long-range improvement plan.
That plan, COMPASS II — Charting the Oakville-Mehlville Path to Advance Successful Schools — contains proposals totaling more than $107 million to make Mehlville a high-performing school district. Those proposals address such areas as technology, safety, early intervention, staffing, curriculum and facilities. District voters would have to approve a 94-cent tax-rate increase to fund the entire COMPASS II plan.
Fischer told the board the 40- to 50-cent tax-rate increase he spoke of that evening was presented solely as a reserve-building measure and does not include any COMPASS II proposals.
Board member Drew Frauenhoffer acknowledged the difference between the Finance Committee’s presentation and the focus of COMPASS II.
“What you’re recommending is: We want to target just sort of breaking even with the 10-percent reserve … But that doesn’t really help us fund COMPASS II, which is: We want to grow. We’re tired of mediocrity in the district. We’re tired of staying the same, we want to continue to grow.
“So we’ve got a couple of things here that at some point we have to make sure we’re communicating clearly to the residents. Why we’re looking for this, why we may need it, versus: Here’s what COMPASS II is all about.”
“That’s correct,” Fischer said. “When there’s increased funds in the operating reserves, the greater the balance, the greater the flexibility. And those funds are not restricted. They’re not restricted to capital needs. You don’t need to get ballot approval to move them over to a different fund.
“And so if the financial picture of the state or just the district from local property revenues improves, as you build up those reserves you can draw down those reserves and decide the appropriate needs for those.”