There is an old style kind of thinking in local government that can be overdone. It is good to have reserve funds. To have balances too low is not good management. However, to consider good management to be how big an entity can build their fund balances is where the flaw comes in. Huge balances and unmet needs are where the clashes come into play. I have rarely seen any local government that has all of their needs met due to some degree of strained resources. I would even go so far as to say that there is a healthy tension when funds are tight enough to cause an organization to set priorities and to be pressured to reallocate resources as a manner of normal business.
How Do You Determine Appropriate Fund Balance Levels?
There is a way to approach this question logically. There are many factors to consider. You look at your revenue and expenditure flows throughout the year. A worst case scenario is if your revenues are heavily weighted toward the end of the fiscal year and your expenditures weighted in the early part of the year. If revenue potential to not materialize is high, you need more reserves. If you are located in the coastal regions where hurricanes are a certainty at some level of frequency, then you need to be prepared with larger reserves. If you are in a hyper-growth situation, the demand for services precedes the tax monies coming in.
If the opposite of these items are true, then an entity could have less reserves and everything be just fine for regular annual operations.
There is also the argument of pleasing the bond holders and bond rating agencies. This argument is often misused or even abused. There are many factors taken into consideration when local governments receive a bond rating. Reserve levels are big concerns, but only one. The local economy, management controls and governing body policies are also very important. There is also a consideration as to how all of an entity’s metrics stack up with not only neighboring entities but also across the country based on size and rating grades.
However, a red flag should go up when you hear locals wanting to shut down a conversation or question by using the rating agency club. Club as in wooden bat, not a fraternity. Twice in the past I have heard the same phrase used by different councils in Texas: “we are so tired of bowing to the altar of the AAA bond rating when we have needs going unmet.”
Let’s Take a Stab at It
Is MISD experiencing rampant growth? I was shocked to learn that the student level for MISD is virtually the same as it was five years ago. That is as far back as I had time to look, but I will be adding an additional five years to my database when I have time. From FY 2011 through the current FY 2016, the student load has been 24,422; 24,733; 24,382; 24,565; 24,715; and 24,915. That is relatively low and stable growth of about 0.40% on an average annual growth rate basis.
BTW, most of the ISDs will publish in their budget and or audited financial statements the total capacity and level of usage by every school in their district. I find it strange that MISD fails to disclose these critical metrics that anybody can understand. We know that the absorption rate in total is about a low of 99 students per year. What is that level by grade and school? What is the capacity and utilization rate by grade and school? Does the Sheep-Board ask these questions? And if they do and know, why wouldn’t they share that great information with us?
During this same time period, the expenditures per student have gone up 2.22% annually. When inflation is taken into consideration, this means to me that spending levels have been flat. We need a new stadium, they say, but not a dime more is being spent on academics on a per student, CPI adjusted basis? Something is wrong with that logic.
At the same time, the revenue base has gone up 3.00%. Due the shifting of state funds to local support with the controversial TRE election and adjustment, property taxes have actually gone up an average of 7.06% annually.
What About Reserve Levels?
This is where resources have shifted, and our attention is needed. The average growth rate of the Fund Balance has grown by 10.84% annually!
So, what is the level that is really needed? One of the ways almost every governmental entity shows this is by the number of days of operating expenditures in the Fund Balance. Some use a percentage, but all you have to do is multiply by 365 to get the statistic that is a little more relatble. For instance, if you knew that the FY 2011 budget projected a fund balance of $45,163,432, all you would know is that the number sure sounds big. However, if you knew that was about 25% of a year’s worth of spending, you get a better perspective. Multiply by 365 to get 90 days worth and now most of us could grasp the degree of reasonableness. Most policies would state a number like 60-90 days, meaning 16-25%.
So, 90 days was good enough for the FY 2011 budget, but how did that year end up regarding fund balances? The answer is 118.7 days. MISD typically budgets conservatively. Then the excesses that could go into the classroom go into Fund Balance. And it is all labeled as good management. If teachers have to go into their own pockets for classroom supplies they think is necessary, and fund balances get bloated, what’s wrong with this picture?
What happened after FY 2011? Glad you asked. Hold on. The Fund Balances have mushroomed. MISD went from 118.7 days (FY 2011) to 135.46 days (FY 2012); 113.38 days (FY 2013 the year of the drawdown before the TRE); 120.53 days (FY 2014); 140.64 days (FY 2015) and is headed toward 134.96 days for FY 2016.
What is the dollar value of Fund Balance projected to be in FY 2016 at 134.96 days of operations? The answer is $74,924,235.
What would that Fund Balance be at the end of FY 2016 if it was at 90 days? The answer is $49,964,294 or $24,959,941 less than projected.
What could it be used for? For operations, but there would need to be controls. You wouldn’t spend $25 million on pay raises, because then you would need another $25+ million for each subsequent year. But there are easily $25 million in the bond program that are actually discretionary items like defibilltors that could have reduced the bond programs.
Could taxes be reduced? Sure could. The fact is that MISD did not need the full 17-cent tax rate in the TRE from two years ago. They were heavy by at least 3-4 cents. Maybe more. Let’s do some math. If MISD gave back to the taxpayers. $25 million over the next five years, how much would the tax rate go down? The answer is 4-cents, almost exactly. The 2016 preliminary tax base is $12.52 billion dollars. MISD is going to generate $17,019,482 more in FY 2017 than in FY 2016 at their $1.67 per $100 tax rate.
More Findings & Conclusion.
MISD is hoarding money. It’s nice to have a cushion, but MISD cannot justify one as large as they have. It could be reduced with little repercussions. They have been intellectually dishonest again, which continues to be confirmed when you dig into their numbers and listen to their yak-yak. Their Sheep-Board should know every piece of information mentioned in this blog. They are either complicit by not asking the questions or already knowing the answers and not establishing policy to cover needs.
The perception that the City of McKinney is growing in leaps and bounds does not translate to MISD since apparently much of the growth has been in the Frisco ISD.
Another trouble spot is that even though MISD has an 8.86% growth in the FY 2017 tax base in the making, 6.98% is coming from revaluations and only 2.14% from new construction. Those same numbers for the City of McKinney’s 10.34% growth are 6.97% revaluations and 3.51% new growth. Neither are very impressive on the new growth part. Revaluation means the same taxpayers paying more unless the tax rate is decreased.
The Certified Tax Roll for FY 2017 will not be finalized until July 25, 2016, so these numbers will change slightly. However, it appears the Appraisal District has adjusted the preliminary numbers to account for some losses through the appeals process.
The numbers I have not seen from MISD is the operating costs of the new stadium. It is a basic tenet in capital projects management that all CIP projects should reveal the operating costs the citizens are buying into. They already confirmed the tax rate equivalent of the “free” stadium to be 4-cents after I pushed for them to disclose it. What is the operating impact going to be? LFM