Fiscal Perspectives: Things Education Leaders Should Keep in Mind

By Brett McFadden and Tahir Ahad - August 14, 2009

The dust continues to settle on many aspects of the recently adopted 2009-10
revised state budget. But as we figure out how to implement this one, we
need to start thinking about the next. Unfortunately, we are not out of the
woods by any stretch. The following are some perspectives we recommend
education leaders consider as they implement this latest version of the
budget and begin thinking about the rest of 2009-10 and start planning for
2010-11.

Continued trouble ahead

We expect two more shoes to drop. It is possible that K-adult education
could face additional mid-year reductions in 2009-10 and further cuts in
2010-11. This latest budget still does not adequately address the long term
structural imbalance between state revenues and expenditures. The budget
includes roughly $15.2 billion in one-time fixes to bridge an estimated $24
billion state deficit. As a result, many in Sacramento are referring to
this as "five month" budget plan. We will likely see additional proposals
for reduction when the governor issues his January proposal.

Absent a dramatic turnaround in the state's economy, the state will likely
have to seek additional budget solutions in the mid-year in 2009-10 and in
2010-11 fiscal year. Education stakeholders will need to pay close
attention to state economic and revenue trends to track possible impacts to
Proposition 98 funding.

There is speculation as to the onset of an economic recovery. Early signs
point to some stabilization in the national economy. However, California's
recovery generally lags behind the rest of the nation. And even when it
occurs, the state's recovery is expected to be rather anemic. Furthermore,
public sector industries (like public education) will most likely lag behind
the state's general economic recovery by 18 to 24 months.

Bottom line - This is a multi-year crisis that doesn't show any signs of
letting up until 2011-12. Construct a three year solvency plan that gets
your Local Education Agency (LEA) through.

Closely watch your cash position

This budget continues and adds several new education apportionment
deferrals. When the state has a cash flow problem, usually it turns around
and quickly makes it our problem.

Roughly one-third of 2009-10 K-adult funding apportionments have been
delayed thru either inter- or intra-year deferrals. District and county
offices must keep a close eye on their cash positions in order to meet short
term and imminent fiscal obligations. The consequences of running out of
cash are too severe and should be avoided.

If you think you will need to seek external borrowing, start that analysis
and process right away. Lending agencies continue to fund Tax Revenue
Anticipation Notes (TRANs) and other borrowing mechanisms, but these
instruments are becoming more expensive and cumbersome to sell.

Bottom line: - Revise your agency's apportionment schedule to reflect
deferrals and update cash flow projections for the current year and the
next. Closely track and update all fund balances. Make sure to use
realistic cash flow projections.

Maintain adequate reserves

Having sufficient cash reserves is not about having adequate fund
balances;it is about having time. A good reserve gives you time to react,
plan, and execute a survival strategy.

New budget language allows districts to reduce their AB 1200 minimum
reserves down to one-third of required levels in 2009-10. But we issue a
note of caution here. This is certainly a time to rely on and use your
reserves. But at the same time, there was probably no other time when we
faced so much uncertainty and need to maintain reserves was this high.
Education leaders should continue to maintain as much reserves as possible
in their 2009-10 and 2010-11 budgets to address possible mid-year
reductions.

Bottom line - Education leaders are advised to maintain as strong a cash
position as is fiscally and politically feasible.

Use fiscal flexibility strategically

The silver lining in this whole fiasco is that education leaders finally
have a lot of the fiscal and programmatic flexibility, which we have been
asking for the past 20 years. Most of these provisions are in place for the
next five years or more. Used strategically, these new policies can be
vital lifelines during the next two years. The new flexibility provisions
include:

1. 42 categorical programs in a new Tier 3 mega item.
2. No minimum reserve for routine maintenance reserve thru 2012-13 for
LEAs meeting Williams facility requirements.
3. New K-3 Class Size Reduction (CSR) penalty structure.
4. Use of specified prior-year fund balances for current year general
fund purposes - expanded from the list provided in the February budget
package.
5. Reduced deferred maintenance match.
6. Textbook adoption requirements suspended through 2012-13.
7. LEAs allowed to sell surplus property not purchased with state funds
for one-time general fund purposes without seeking state authority.
8. LEAs authorized to reduce instructional days from 180 days to 175
days through 2012-13.

Bottom line - Be strategic when using these new flexibility proposals. Use
them in context of your multi-year strategy and to meet your core
priorities.

Other strategies to consider

1. Re-examine and re-establish your core mission and priorities.
2. Staff according to your mission and priorities.
3. Monitor your staffing and personnel expenditures.
4. Be realistic about negotiations - make your long term finances match
up with what you are providing at the bargaining table.
5. Make sure your bargaining positions match your updated core mission
and priorities.
6. Prepare for negotiations - develop core values for negotiations.
7. Create realistic multi-year projections and update them when your
assumptions change.
8. Leverage other funding where appropriate and feasible to free up
general fund monies.
9. Invest available one-time federal ARRA dollars to maximize ongoing
benefits - such as professional development or capital improvements.
10. Be conservative - plan for the whole three year period.

Continue to think big - your leadership matters

Regardless of the fiscal challenges and uncertainties, your charge remains
to provide best possible education and co-curricular opportunities for the
students under your care. Additionally, the requirements imposed upon the
LEAs by the No Child Left Behind and the state accountability measures have
not gone away. Even if someone were to eliminate or suspend all
accountability measures, our moral obligation to ensure that a generation of
students does not go under-served is still in place. One thing you cannot
afford to allow the faculty and staff to do is to cite a lack of resources,
throw their arms in the air, and give up.

Now, more than ever, the leadership matters. Motivating and leading
battered professionals who have recently taken hits to their pay and
benefits will require courage, conviction and determination. They need to
be reminded that, like all other times in the past, this storm will pass,
too. The mission of educating our future generation and preparing them as
productive citizens is too noble to be compromised.

No one underestimates the course that lies ahead. And those who understand
what lies ahead appreciate the tremendous efforts the district and County
Office of Education leaders are making, despite these most difficult
circumstances. Your district's students, staff and community count on your
leadership as they watch, listen and observe you lead and guide them through
these times.

Conclusion

The symptoms of fiscal stress for an LEA remain the same as they've always
been. But the problem now is that the margin of error is much smaller.
Under this new reality, education leaders can do everything right, and still
end up in trouble. Your agency's fiscal solvency has always been critical.
But it usually has either equaled or come in second to your instructional
priorities. Not anymore. For the foreseeable future, your fiscal viability
trumps all other priorities - since without it, you may not be able to
protect your core instructional strategies and programs.

Editor's Note: Tahir Ahad is President of educational consulting
firm Total School Solutions (TSS) , and Brett McFadden is Management Services
Executive at Association of California School
Administrators (ACSA).