School Board Receives Updated 5 Year Financial Forecast

Why should you care about the School Board’s updated financial forecast?

If you have kids they deserve to go to an "excellent" school for years to come. If you have no kids in the Lakewood schools, you still own property or rent and pay school taxes. If you own property - your property value can be affected by the school where you live. People like to live in cities with strong schools.

I care, so I attended the October 3, 2011 School Board meeting where district Treasurer Richard Berdine released and reviewed an updated 5-year (Fiscal Year 2012 to 2016) financial forecast for our School District. The forecast showed flat to declining revenue (property tax and state funding) and increasing costs (personal and healthcare) that will “require our attention now and into the future."

The presentation lasted approximately 20 minutes and included a PowerPoint presentation, an updated forecast and educational report, and a new 5 year financial forecast. If you are interested, it is available on the Board’s website (http://lakewoodcityschools.org/districtBoardEd.aspx).

What did the new forecast show?

The new forecast includes numerous new assumptions which reflect the economic reality the city, state and county are facing. Overall it shows an improved financial position next year (FY 2012) with a loss of $1.5 million versus the original assumption of a loss of $3.0 million driven by improved tangible personal property revenue and lower personal cost.

However, the next 4 years show deteriorating financials with losses of $5.0 million in FY 2013 ($4.9 million previously), $8.5 million in FY 2014 ($8.0 million previously), and $11.6 million in FY 2015 ($10.6 million previously). FY 2016 shows the District with a $14.5 million shortfall that needs to be addressed (no prior estimate).

The final forecasted numbers are actually worse than these numbers due to an error in the original forecast that was found during follow-up meetings with the treasurer. The corrections are discussed in detail later in this story.

After all the changes, the takeaway for Lakewood is that despite a better near-term outlook we still have an approximate $16 million shortfall over the next 3 years that must be addressed.

What happened after the presentation?

After the presentation, Mr Berdine opened the floor to anyone with questions or concerns. I was surprised to find that no-one in the audience or on the Board had any questions, given the scope of his presentation. I had numerous questions including:  

• If property values decline 8% why does property tax revenue decline only 1%? ($330,000 vs $3.0 million), 
• What happens if property values decline more than 8%? (other towns are seeing 15%+),
• What did the $1.1 million in stimulus and $6.3 million in state funding that we are losing cover?  
• What is driving the significant increase in healthcare premiums from the 0-4% range to the 12%-16% range? 
• And the most important question, who reviewed the financials and questioned the assumptions to ensure that we have strong processes in place to create a solid 5 year forecast?

What happened after the Board meeting?

I was not satisfied and felt that follow-up was needed. On October 5th I was able to meet with Mr. Berdine to discuss the five-year forecast and follow up on my questions. In that meeting I learned the following:

• Only the “inside mills” at $4.8 million and the 2010 levy at $6.3 million will show a decline in revenue due to a reduction in property values (a by-product of HB 920).
• If property tax values drop more than 8% these two revenue sources will drop with the lower values.  Should property tax values decline more than 15% other sources of revenue will start to decline as well.  
• The stimulus dollars covered several areas including some elementary school teaching positions that will have to be cut in the future.   
• The increase in healthcare premiums is partially the result of increased utilization rates by employees which is being offset by an increase in our stop-loss amounts which saves us $200,000 a year in premiums. 

On my last question about the processes in place to review the forecast, it turns out that there was limited review and discussion of the forecast prior to its release. Who wants to get involved in all these numbers, right? However, it is important that we have the processes in place to guarantee that someone does. Why? Because without the proper processes in place, errors happen. 

Two errors:

During this meeting and a follow-up conversation, we found an error in the 5 year forecast pertaining to the loss of revenue due to declining property assessments. The error was the result of a bad formula which did not pull in all of the information. This mistake came to light because of my question about why property tax revenues were not declining at the same rate as property values. In reviewing that question, we discovered the error (it counted only the inside mills not the 2010 levy) which reduces forecasted property tax revenue by an additional $480,000 a year. The revenue loss will be partially offset by cost reductions of approximately $200,000 a year related to an additional error Mr. Berdine found in the forecasts. 

The errors and their corrections have been reported to the School Board and will be reflected in the updated financial forecast presented to the Board at this week’s meeting. A bigger question is, would this error have been found had I not followed up? One would like to believe so.

What can we do?

My background and expertise happen to be in finance. Because of that I was able to work with our administration on the forecasts and offer expertise the Board does not have. The biggest risk to our schools’ “excellent” rating is the financial crisis we are going through and I am proud that I could help out. If you have an expertise, be it financial, legal, real estate, etc. you can get more involved. Attend School Board and Council meetings. Work with our elected officials to improve our city. Vote on November 8.

Only by working together will we navigate these tough times successfully.