The Palo Alto Unified School District's new fiscal year is just 15 days old, but the impossible has already happened.
Less than a month after approving a budget that relied on an almost 9 percent increase in property-tax revenue for the coming year, the district has learned that the Santa Clara County Assessor is projecting an increase of just over 5 percent.
The shortfall will be about $5.2 million, although the actual budget impact will be around $3.7 million due to the automatic elimination of a 1 percent bonus for employees in 2017.
The error stems from the district incorrectly interpreting interim county numbers that included about $1.2 billion in tax-exempt property-valuation increases for the new Stanford hospitals.
The revelation is a severe blow to the district and raises serious questions about the due diligence performed by Superintendent Max McGee and his staff and the board's fiscal oversight. County Assessor Larry Stone told the Weekly the growth numbers should not have come as a surprise to the district given the regular meetings his office has with all school-district financial officers and the cautions given about exemptions and other variables.
In a robust economy with growing property-tax revenues and a newly approved and increased parcel tax, the Palo Alto school district shouldn't have to budget revenues aggressively or draw on reserves. Reserves are for rainy days, not for use during peak periods of economic growth.
The board should never have approved three-year labor contracts in late May when accurate tax-revenue data would be available just a few weeks later. And it should not have granted "me too" retroactive salary increases to non-union managers and administrators.
In an email Wednesday morning to the board, top administrators and principals, McGee said he was "surprised and disappointed" to learn the news. He suggested that instead of making expense cuts to offset the revenue shortfall, the gap should be funded from reserve accounts, an action that would effectively sweep this major problem and embarrassment out of public view as if nothing happened.
With 85 percent of the district's expense budget going to compensation and benefits, and more than 71 percent of the revenues coming from property-tax revenue, these are the two drivers that require the utmost scrutiny, analysis and public debate.
Concern over the district's vulnerability to errors in the projection of property-tax revenue was raised by board member Ken Dauber when the union contracts were up for approval in May, but his four colleagues were all satisfied that the 2016-17 revenue projections were solid and voted in favor of the contracts, and a month later, for the budget.
The budget problem is a further blow to parents who have shown that class sizes in the middle and high schools have been consistently larger than the averages set by board policy. Dauber and these parents unsuccessfully argued that the hiring of the additional teachers to bring the class sizes down, especially in core academic classes, should be a top budget priority. With the latest budget problem, it now seems even more unlikely that there will be money available for this correction.
Except for Dauber, school board members were persuaded by McGee and Chief Budget Officer Cathy Mak that the district would have 18 months' advance warning of lower rates of property-tax growth, based on being able to see home-sale data trends in advance of the actual changes in tax payments, and therefore plenty of time to adjust budgeting. Neither McGee nor Mak mentioned the risk that property-assessment numbers could be impacted by tax exemptions.
School-district budgeting is never an exact science, but Palo Alto has made a big "miss" that is compounded by the generous (and first ever) three-year labor contract just approved.
McGee and his staff now need to present the board and public with a clear picture of the financial road map forward, including how he expects to balance the 2017-18 budget, which relied on another large increase in property-tax revenues. He should also immediately suspend the scheduled compensation increases for non-union managers and administrators until the board can determine how it will address the budget problem.
And the board, which spent countless hours talking about ways the district might add or expand programs, only to use up all its increased revenues on compensation, needs to assess its own failure to manage the budget in a fiscally responsible way.