How many of us have been on a wooden ship in stormy seas? We may feel like that is what we are going through with the current pandemic, when in fact we didn’t get much of a chance to batten down the hatches before it hit us. Here is where the term “batten down the hatches” comes from:
“To batten down the hatches is a nautical term from the early 19th century. When a ship was about to enter rough seas, the captain would order the crew to batten down the hatches. The crew would close all the hatches (doors) on the ship’s decks and use lengths of batten (rods) to secure the hatches in the closed position.”1
We do have another storm—a recession—that may hit us even before this pandemic has subsided. Before the pandemic hit, more than half of all local school agencies had been declining in enrollment for years, and the slowdown of just the cost-of-living adjustment (COLA) for revenue increases for the Local Control Funding Formula (LCFF) had begun. Even local school agencies that haven’t been declining in enrollment found themselves to be deficit spending due to myriad cost pressures, including:
- Rising pension contributions
- Increasing health benefit contributions
- Increased salaries due to step and column movement
- Maintaining competitive compensation, and
- Increasing contributions to critical programs like special education and child nutrition
While local school leaders have been faced with the impact of the pandemic on school operations, on students and parents in local communities, and on their own personal lives and families—the economic impact will also be felt in all of these areas. Our state policy makers have expressed concerns about the financial impact, as a decline in state revenues is anticipated and local schools are likely to see fewer resources allocated to them from the state in the near future. Also, while the hold harmless on LCFF revenues from the state this year and the allocation of the COVID-19 LEA Response Funds from Senate Bill 117 (Chapter 3/2020) are significant to local agencies, most if not all are spending more than what they had budgeted for in order to provide distance learning, meals to students, and other services to the students that need them during this time.
Considering all of this, we think it’s time to batten down the hatches—if your agency hasn’t already. That includes changing the way the local agency budget is developed and planning ahead to prepare for lower funding. It also includes making sure that local stakeholders are brought along in the process. What follows are the broad strokes of some potential actions to consider.
Most local agencies are well into developing their budgets for next year, and it is important to have the current-year budget as a solid springboard. Now is the time to conduct a thorough update of your current-year budget to reflect the latest information and activities for your agency.
For revenues, knowing about the Second Principal Apportionment and Annual hold harmless on average daily attendance (ADA) means a solid estimate of LCFF revenues can be prepared. However, that is not going to be the case for the last two quarters of state Lottery revenues, nor will it apply to many local sources of revenues which will decline as a result of the pandemic. As examples, fees for the use of facilities are likely nonexistent now, developer fees have likely declined, revenue from paid meals and transportation fees have ceased, and local donations have been significantly throttled back as families and community members deal with their own personal and professional challenges.
For expenditures, LEAs are continuing to pay their employees. However, there may be some adjustments to make in the budget for extra pay, substitutes, overtime, or other types of variable wages. There may also be premium pay for employees continuing to work during this time. It’s time to make further adjustments to salaries and benefits for vacancy savings, negotiated compensation settlements, or other changes since the 2019–20 Second Interim report was completed.
The technology budget will need to be scrutinized to determine what the current-year impact will be of purchasing and issuing technology to students for distance learning and to staff for working remotely, including the cost of additional internet access or wireless network devices. There may be adjustments necessary to other expenditure categories, such as professional or consulting services, contracted services for repairs, professional development providers, and travel and conferences. At this time the expenditure budget for books, supplies, and food for student meals should all be evaluated. Normal purchasing of books and supplies may have throttled back, but likely food expenditures have increased. Once the current-year budget is updated, the estimated ending balance forms the basis for next year’s financial plan.
Next Year and Beyond
Estimating revenues will be challenging for next year and beyond. All indications are that the local agency revenue outlook will be dampened from what was anticipated in Governor Gavin Newsom’s January State Budget proposal. The current COLA of 2.29% estimated in January for the 2020–21 fiscal year is likely to be lowered at the May Revision next month. In addition, the subsequent-year COLAs are vulnerable to being lowered. Once the May Revision is released, we will have the anchors for your out-year projections in addition to likely more conservative contingency assumptions.
State Lottery and local revenue sources will also likely continue to suffer from the economic slowdown as a result of the pandemic. The current-year experience, short as it has been thus far, could provide the best estimate for these revenue sources going forward.
For the purpose of student enrollment and ADA projections, keeping ears to the ground in the community is very critical now and in the coming months. Growing enrollment from local residential development projects may not entirely come to fruition. Student mobility will likely increase due to families moving in or out as parents become unemployed and/or find employment elsewhere, students shifting to public schools from private schools, or families coming or going because of the cost of housing, and many other factors.
On the expenditure side, the staffing budget should already include the pension contribution increases, staffing reductions or increases, and other factors that were anticipated before the pandemic. Faced with lower anticipated revenues in the future, many local agencies may be faced with making further reductions. Other than finalizing the March 15 certificated preliminary layoff notices in May, certificated staffing for next year is mostly set. A local agency that needs to reduce staffing costs can evaluate classified staffing levels at any time of the year, which means determining whether certain services need to continue or will no longer be needed.
For all staff, it’s not too early to consider offering an early retirement incentive sometime next year. If your local agency has a significant number of staff members at the tops of the salary schedules and a reduction in staff is needed, an early retirement incentive could be a way to encourage long-time staff to retire and provide room for new hires only for those retiring staff positions that need to be replaced. A cost/benefit analysis can indicate whether an early retirement incentive can have a positive impact on your work force and your budget.
In the words of our friends at the Fiscal Crisis and Management Assistance Team (FCMAT), “Cash is King!” By the end of the last recession, the words were changed to “Cash shows no Mercy!” Remember, the state-required minimum reserve level of 3% of total General Fund expenditures equates to only 5 to 8 days of payroll. General Fund reserves are an indicator of the cash balance but are not the same as cash—cash is but a portion of reserves. It is possible for a local school agency to have a positive ending balance but run out of cash, especially if our state policy makers once again decide to resort to cash deferrals as a solution for the state’s financial woes.
It is important to invest the time necessary to reconcile all general ledger accounts, including cash, every month and revise cash flow projections accordingly. We at School Services of California Inc. (SSC) always recommend that cash projections be prepared at least 18–24 months out so that cash deficits can be managed through local cash borrowing, by making budget reductions, through a hiring and spending freeze, by accelerating cash collections, and/or by delaying cash outlays so that the state does not have to step in. In other words, managing cash is critical in maintaining fiscal solvency and local governance.
Communicating information about your local agency’s financial situation is vital in bringing along your local agency’s stakeholders. Your governing board, employee groups, other stakeholders, and the broader community need to know and understand the impact of the pandemic on the world, national and state economies, and the anticipated impact to your budget, your schools, and your community.
These communications have to be through electronic means right now. But once the shelter-at-home order is lifted, use all avenues available to your agency for communicating with the broader community. Budget review committees, parent-teacher organizations, community club meetings, local chamber of commerce meetings, and other venues are opportunities for communication and engagement. More communication is needed, not less. More budget analysis and budget updating are needed, not less.
There are always many moving parts to the local agency budget that require revisions to be made all year long, both upwards and downwards. Managing these complexities is made more challenging in the current circumstance and as we face the coming storm. We at SSC are honored to serve you and to continue providing information, support, and advice along the way. Stay tuned . . .