The Audit/Finance Committee continued its meetings about the 09-10 budget this past Monday. The process is a bit different than you may have seen in the past and I do like it better than how we approached the budget last year. Just in case you don't get enough of us on the Board, the Committee meetings are now being televised. This will continue to be the case until we pass the budget.
Most of the budget documents from Monday's meeting can be found at the District website at http://www.mtlsd.org/district/budget/budgetmeetingdocuments.asp. If you are going to read through this post then I would suggest having a window open with the 5-Year forecast of budgeted expenditures. To me, this is the place we need to start. As I have said in the past, I am not a fan of budgeting only for THIS year. We need to budget for this year while seeing what kind of impact the budget will have on taxpayers in future years. In some instances, having a zero mill increase today will result in a much higher mill increase in a future budget. In fact, in this budget I can already see some discussion happening with how to approach the looming teacher pension problem and I believe that there will be some disagreement on how to plan for that huge spike in expense.
In February, I had put together my own five year projection and it was good to see some of the numbers confirmed by finance director Jan Klein's forecast. For example, in my budget for 2012-2013 I had a $46,437,088 expense line for teacher salaries. Ms. Klein shows $46,647,820. I hadn't talked to Ms. Klein about salary growth rates but understanding what our teacher contract looks like and what our other obligations are, there are some numbers that just make sense. Teacher salaries expense is one such number and since it makes up more than 50% of our total expenditures, its an important number to get a handle on.
I want to take a broad view of the forecast for now. You can see on the five year forecast what assumptions are being made. They include the following:
1) Salary expense increases of 3.4% per year with no changes in staffing levels. This makes sense in that our teacher contract dictates what future obligations we have with regard to salaries. I am certain this Board will take up the issue of staffing levels before this budget passes.
2) 8% increases in medical expenses- Given historical patterns this makes sense. However, it is a good idea to keep on your radar the idea of a statewide teacher health insurance program. Governor Rendell has talked about that for awhile. At best it will reduce healthcare costs and not eliminate them.
3) No money set aside for retiree health care. You may remember last year that we took some surplus money and decided to allocate it towards funding an OPEB trust. This trust was to put aside some money to address a large retiree health care liability that the District has. Deciding not to set more money aside now means that it will simply be pushed to the future.
4) No change in real estate assessments. Honestly, if you have any idea whatsoever what our assessed valuations will be over the next 3-5 years, please let me know. What I do know is that when we changed the way we taxed people in 2002 to be for the full home value as opposed to a percentage value, the District was forced to change millage in kind so as not to receive a windfall of property tax revenues. My best guess says that this will again be the case. No matter what the assessed valuation changes to, the District will again be asked not to make a mint off that change. In both Ms. Klein's forecast and the one I put together, we kept the assessed valuation the same for the length of the forecast.
5) $117 Million for High School Construction.
6) 30% loss in PSERS investments for 2008-2009. This expense right here is the one that has me scared the most. I posted about the 250% increase in PSERS contribution rates in December. Since then, the contribution rate has jumped even further due to stock market losses. PSERS right now is projecting a 30% loss on investments for 2008-2009 (their year end is June 30, 2009). They are then projecting 8% returns (down from 8.5%) in future years. Listen, if you could guarantee me 8% returns for the rest of my life, sign me up. Having been a financial planner, I know good numbers when I see them. How many of you would ditch your 401k investments today for an 8% return going forward? How does PSERS expect to do this with a 10-year average return of 4.5%, a 5 year return of 3.88%, and a 1 year return of -1.88%? Understanding that past performance is no indication of future results, banking on an 8% return in an environment like this is probably not the right thing to do.
Given all the above information and seeing that our revenues (which the Committee went over last month) are largely driven by our millage rate, state reimbursement rates, and earned income taxes, the five-year forecast show some interesting things.
First, the high school project in this forecast is phased in over a few years. This results in millage increases in 2010-2011 (2.68 mills), 2011-2012 (1.59), and 2012-2013 (about 4.17). These millage increases are not due entirely to the project but are largely a result of the debt needed to finance the project. You can see on the Transfer-Debt Svs/Capital Fund line how the debt service number keeps creeping up until 2012-2013.
Second, the pension obligations rear their head in 2012-2013. This is illustrated by the almost $10,000,000 increase in the Fringe Benefits section of the budget. Given that 1 mill equals about $2 million in revenue, this spike alone will result in a significant millage increase for the District. Under current law, the State reimuburses us for half of our pension contribution payments. This is why you see the revenue from the state increase the same year by $4.5 million. Between the pension spike and the high school debt, the 2012-2013 budget is projected to result in a 4.17 mill increase.
In the end, you can see that the millage is forecast to be 37.13 in 2014-2015. Today your millage rate is 24.81. This forecast shows what might shape up to be a near 50% increase in property taxes.
Before you step to the edge of that cliff or put your home on the market, please understand that there are Districts across this state that will be in a very similar boat to Mt Lebanon. The pension liability problem is about as big a financial problem as we can have. Other districts are dealing with it in their own ways. Upper St Clair has made their financial forecast available to its residents. Since it is a public document and was forwarded to me by a resident of USC, I have posted a link to it here. Their forecast is not quite as dire as ours but I do not believe at the time it was published that it included the new renovations they are now talking about. At least those renovations are not included in the expense assumptions outlined in the presentation.
This forecast, and the one I had in mind last year, are what convinced me that moving ahead with a high school project in this environment would not be the most fiscally sound decision. Until we can put a five year forecast in place that does not result in such a large financial burden being pushed onto our taxpayers, I am reluctant to spend anywhere near $100 million. Our budget is not just about the high school project. It is about how we educate our kids, how we prioritize the use of taxpayers funds, and how we plan for our future. We don't have the ability to run a deficit budget to "invest" in things by borrowing money like our federal government does (nor do I want that ability). Every taxpayer dollar matters. A potential 50% increase in property taxes over five years should give everyone pause.
I'll post more next week.
Thanks for reading.
James
