Friday, November 13, 2009

Costing School Settlements with Courage

I've been running a series on what School Boards need to do to improve the financial structural mess in Minnesota. When I started the series, I said that I spoke to a powerful Minnesota legislator about the financial crisis in public education. I said that I was urging that legislators need to do something bold and dramatic to address the crisis in public education. I argued that they need to give us the power to balance revenues and costs during this crisis, or if they won't give us the power, they need to do it themselves. The crisis is manifest by constant cuts in programs and services followed by operating levies seeking to make up the difference. Do something, I said. Either give us more money, or give us the power to control our expenses, so we can maintain quality programs. But for God sake, you have to put an end to a system that continually forces school districts to pay out more than they can afford to. The legislator told me that we school board members need more courage. So I decided to write a series about everybody's role in the school finance mess, beginning with school boards and local districts.

In today's post, I want to explain how school districts avoid and evade publicly disclosing the amount of their labor settlements. One way of doing this is to understate the cost of their settlements. If the legislature provides us with a 2% increase in funding, its hard to explain publicly if we increase our compensation costs by 3% for that year, isn't it? If you increase compensation by more than you received, then you are going to make cuts, and if the public knows that you are making those cuts because you gave more increases than you have, they're likely to be pretty upset. Because if you do that year after year, eventually, there's not going to be anything left. But over the last decade, as state funding increases have declined, but pressure for settlement increases has continued unabated, school boards and especially school superintendents, have increasingly tried to soft pedal the persistent difference in revenue and cost increases, by avoiding full transparency on the impact of financial settlements.

This issue is a major concern for several reasons. First, if school districts are not transparent about the true cost of settlements, it evades public responsibility. Second, if school districts are not transparent about the true cost of settlements, then the State of Minnesota--governor and legislature, cannot make a connection between increases in State funding and local financial problems. Third, if school districts are not transparent about the true cost of settlements, it makes it exceedingly difficult to devise a solution. We can never arrive at a financially stable public education system if we don't understand what it causing our difficulties in the first place.

There are several devices that folks in education use to understate the disparity between (and the reason for) increases in revenues and increases in cost:

  • They can ignore some of the costs that are actually involved in the settlement. You'll see an example of that in the table below
  • They can "backload" the settlement so that the impact of the increases take place in a later year, making it less transparent that the cost increases agreed to have caused the cuts that result. We'll talk about backloading in a future post
  • They can use calculation devices that understate the percentage increase in the settlement (or leave out the total cost of the increase) when they report it publicly. We'll see an example of how that is done in the table below. It is very common for school districts to report an increase as being, say 8 percent, when it is really 10 percent, by use of a form of fuzzy mathematics.
  • They can ignore the costs of steps and lanes in the calculation and report only salary schedule improvement. We'll discuss that in subsequent posts.
One way in which the financial cost of settlements is understated is to fail to the entire cost of the settlement. To understand this issue, let's look at the following hypothetical costing summary from a labor settlement or proposal. The costing sheet for an actual settlement proposal is fairly complicated. It contains a listing of all of the elements of employee compensation, including salary and benefits.

Costing MethodBase YearYear 1 Year 2Total CostPercentage
Education Minnesota Method$45,225,000$46,626,000$48,837,000$2,889,8976.3 %
MSBA Method A$51,047,000$52,795,000$55,213,000$4,265,0006.0%
MSBA Old Method$51,047,000$52,795,00055,213,000$6,013,0008.0%

To read this chart, you need to understand that costing starts with the base year cost. Under this example, the total cost of all compensation is $51 million in the base year. The cost rises to $52.8 million in the first year and $55.2 million in the second year. To fund this settlement, the District will need to come up with $6 million extra dollars during the two year period. The total compensation package in the second year is about 8 percent higher than the base year.

But Education Minnesota will report this as 6.3 percent increase over the two years, costing only $2.8 million. What a difference!

In the above example, Education Minnesota is saying that the base year cost is about $45.2 million with an increase to $46.6 million and $48.8 million respectively. But the actually cost of the settlement begins with a base year of $51 million and rises to $55 million. So, one problem with the Education Minnesota method is that it doesn't account for the actual cost of compensation. This is a trap for school boards, because it presents a misleading picture of what the district is paying for compensation, and a misleading picture of what is being increased, and a misleading picture of the cost of the package.

But there is another misleading element of the Education Minnesota method. It pretends that the increase from the base year to the first year is not paid in the second year. The increase paid in the first year is paid again in the second year, but the Education Minnesota method just discards that amount, and pretends that it isn't there. If you do the math, you will see that the total increase in compensation under the Education Minnesota method is actually $5,013,000, not the $2.8 million displayed on the table If you subtract year one from the base year and year two from the base year, and add the two together, you get $5 million, not $3 million. The Education Minnesota completely obliterates $2 million in costs. When a school board uses this method, it is completely misled as to the true cost. When the newspaper reports this method, it is understating to the public the actual cost increase. Notice that by doing this, the Education Minnesota method makes it look like these $2 million in extra expenses came from somewhere else entirely. Everyone says, what happened to that money? It must be inflation, someone says.

When a school district wants to quiet public concern, it may resort to reporting the lower numbers. And, in fact, in the last several years, the Minnesota School Boards Association has advised school districts to use a new method which under-reports the rate of increase. In the above example, this new method would report the increase as 6 percent, as suggested by Education Minnesota, instead of the true increase of 8%. Many of the school districts in the State, but not St. Cloud, have adopted this new method of percentage reporting, which significantly understates the rate of increase of the settlement.

While this change may make the public less concerned, it does a great disservice, because it keeps policy makers from understanding what is happening to school finance. If you think that costs are going up 6 percent per two years, instead of 8 percent per two years, you simply cannot address the true nature of the problem. And, if the legislature is trying to fund the increased costs, it cannot address the problem when it is misled about the rate of growth in these costs and what is causing them.

If we board members are going to be courageous, we need to confront financial realities and accurately report the true cost of labor settlements. If we are going to pay more, we need to advocate that the legislature increase revenues by the amount of the increase, and we need to communicate the true reason for what we are doing. Part of what is going on here is that school superintendents and school boards are truly frightened by the continuing spiral in which they pay out more than they take in. The panic is so severe that it is hard to stand up in public and explain what is actually happening. And, when you actually explain it, the folks in St. Paul don't seem to want to hear. Why explain a problem that nobody wants to solve? The continued spiraling gap between money out and money in is going to kill public education eventually. Many folks are just hoping it doesn't happen while they are still around to get blamed.

In my next post, I'll talk about some other issues in the way settlements are structured that lead to confusion in the cost of settlements.

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