Projections of future deficit spending by the Denair Unified School District caught the eye of state and county officials, who worry such a scenario is the slippery slope that could return Denair to the precarious financial situation it was in eight years ago.
School districts pass budgets in June that govern fiscal years that begin July 1. Each budget anticipates spending not only for that year, but for two years into the future. In Denair’s case, the balanced budget school trustees approved June 4 also projects the district will spend $151,593 more that it receives in state and other funding in 2021-22. The district’s plan would be to dip into its reserves that year to make up the difference.
That situation raised red flags at the Stanislaus County Office of Education, which reviews all school district budgets. Officials there recommended a a Fiscal Health Risk Analysis (FHRA). That report was delivered to Denair trustees Thursday night at their monthly meeting.
An FHRA measures a district’s fiscal health in 25 areas, then assigns a score. The higher the score, the more the perceived risk. Denair’s score was 34.5, considered to be in the “moderate” range, a state auditor told trustees. But the rating was increased to “high” because of the projected deficit spending and other concerns raised at the county level.
Among those concerns is the salary restoration process for employees that led to 1.75% increases for teachers and 3.5% increases for Classified staff last year. That brought their pay back to levels from 10 years ago and erased steep, across-the-board salary cuts implemented when the district went through a financial crisis eight years ago. The red flag was raised because the Classified amount was slightly above the 3.26% cost of living allowance used in the budget analysis.
Linda Covello, the district’s chief business official, defended trustees’ decision to adjust pay.
“It was the right thing to do,” she said. “The district had the money to make restoration happen and so we did. In my opinion, these are not raises, but just bringing employees back to being whole.”
The FHRA also raised questions about how the district blends budget figures for its two charter schools – Denair Elementary Charter Academy for kindergarten through fifth-graders and Denair Charter Academy for home-schoolers and independent study teens – with the budgets for Denair High School and Denair Middle School. Enrollment has consistently grown at the charter schools, but has been relatively flat at the two other campuses.
The report says that combining funds “makes it difficult to understand the district’s true financial condition” and recommends separating the budgets.
The report also says Denair should improve internal financial controls, pay close attention to its reliance on development fees from new homes to pay off Certificate of Participation bond debt – which was used for building projects, including the high school gym – and plan for a reduction in state funding next year because of the COVID-19 health crisis.
The analysis recommends that Denair make significant expenditure reductions to maintain fiscal solvency.
“The district’s immediate corrective action should focus on deficit spending or it risks having to get a state loan and lose local control,” said Shayleen Harte, deputy executive officer for the Fiscal Crisis and Management Assistance Team sent by the state. “Get in front of it and prepare a plan that is detailed, that has a timeline.”
Covello said Denair already has whittled the projected 2021-22 deficit to $136,517 since June by reclassifying some jobs, which will save on salaries. A study session will be held Oct. 29 to identify other areas of savings. Three public meetings will be held in November before a deficit reduction plan is presented to trustees at their Dec. 10 meeting.
“The issue with deficit spending is that it compounds year after year and to truly eliminate the deficit spending, ongoing expenses need to be reduced, meaning the savings are not just in 2021-22 but also the following years,” Covello explained. “This will be a big part of our conversation over the next few weeks … because one-time savings only postpones deficit spending without actually eliminating it.”
Despite the worrisome state report, Denair still has plenty of money. The district’s ending fund balance in 2021 is projected to be $900,277. That includes $852,401 in reserves, well above the 3% minimum of $461,480 required by state law.
“Based on what we are hearing, the state is facing drastic cuts” in education spending, Covello said. “The district needs to be able to have a reserve to offset those cuts going forward, so depleting any part of the reserve on deficit spending is not wise.”