The Palo Alto Board of Education will hold a special meeting this afternoon to discuss how to address an unanticipated drop in property-tax revenue that has left the school district with a $3.7 million budget gap in the just-commenced fiscal year.
The district learned about two weeks ago from the Santa Clara County Assessor's Office that projected increases in property-tax revenue has dipped to 5.34 percent, significantly lower than the 8.67 percent increase the district relied on in creating its 2016-17 budget, adopted on June 21. The change is due to a rise in assessed properties that are exempt from property taxes, primarily $1.2 billion in exemptions from the major expansion of Stanford University hospitals.
Since budget estimates for future years were built from the now-incorrect assumptions on property-tax increases this year, the district faces a multi-year financial problem that has not yet been quantified by Superintendent Max McGee or Chief Budget Officer Cathy Mak.
Mak said that while she has looked at the impact on the 2017-18 and 2018-19 budgets, it will not be discussed today. She declined to share her projections, stating that that will be done at the board's next meeting on the topic.
If the property-tax increases for the 2017-18 fiscal year are adjusted downward to be 5 percent instead of the budgeted 7.85 percent, the district would face another deficit next year of almost $4 million if the just-approved pay raise for teachers that year was completely eliminated, and more than a $8 million deficit if the 3 percent raises were allowed to take effect, according to calculations made by the Weekly. The problem grows potentially larger in the out-years depending on assumptions about property-tax increases and compensation increases.
"In keeping with the practice of 'seeking first to understand,'" McGee wrote in a staff report, the purpose of today's meeting "will be to provide the Board and community with an understanding of the budgeting process and the context for the difference between the district's property-tax revenue projections" and the most recent estimate from the county Assessor's Office.
Though the estimated total tax shortfall for the current fiscal year is $5.2 million of Palo Alto Unified's $231 million budget, the new projection will trigger a safety-net condition in the new multi-year teachers' union contract that eliminates a 1 percent bonus for teachers when property-tax revenue is less than the district budgeted by 1.5 percent or more. This reduces the actual gap in the 2016-17 budget to $3.7 million.
Mak and McGee have preliminarily suggested that the district make up for the lost revenue this year by pulling $1.2 million from unrestricted, undesignated funds; $1.2 million from bond funds designated for computer updates; $375,000 unused dollars in the budget that had been allocated for the hiring of teachers to accommodate enrollment growth; and not transferring $919,000 to the district's Basic Aid Reserve Fund.
The district does not intend to cut funding that has already been approved to lower class sizes, support full-day kindergarten or use any reserve funds that would result in the reserve dipping below a 10 percent level required by board policy, according to a staff report.
Following a staff presentation on Wednesday, board members will be asked to share their own ideas for how to address the shortfall, according to the staff report.
McGee cautions in the staff report that "while it may be tempting to take immediate action, we are not in an emergency or crisis situation. Action is needed, but it must be thoughtful and deliberate and not reactive."
The district could reopen negotiations with the teachers and classified employee unions on a 3 percent raise promised in the third year (2017-18) of their contracts, which in total provide a 12 percent base salary increase over three years, plus the off-schedule bonuses. (An off-schedule bonus is not added to the employee's base salary.)
Given this, and the fact that managers' and administrators' raises have not yet been settled on for the 2017-18 year, McGee wrote that the district is "able to take a longer view of ways to make up the shortfall."
"In fact managing compensation for 2017-18 and beyond will be of critical importance in assuring that we can continue to provide the highest quality of teaching and learning, equity and access, and wellness and safety for our students," he wrote.
As McGee also notes, the sudden tax shortfall is not a one-year problem, but "will have implications for the longer term."
Though district leadership has characterized the smaller property-tax increase as a surprise, district data provided in the meeting packet shows that in years past, there has been a similar difference in projections from June 1 to July 1, though it has not always been a decrease. (This year, the assessment growth was estimated at 8.62 percent on June 1, then dropped by about 3 percent on July 1.) In 2014-15, the July estimate was 2.82 percent higher than the June projection. In 2013-14 and 2012-13, it was just above 1 percent higher. And in 2010-11, it was 2.79 percent lower on July 1 than on June 1.
This year's change in exemption value was also similar last year: $1.4 billion compared to this year's $1.1 billion, according to data provided by the district.
Total exemption values came in at $9.1 billion this year, compared to $8 billion last year, according to Mak.
Wednesday's meeting will be the first of several McGee is proposing to hold regarding any changes that need to be made to the 2016-17 budget. At subsequent meetings between now and then, McGee suggests that staff will respond to board ideas and present recommendations for changes to the budget. The board will also discuss the budget at a previously scheduled retreat on Aug. 11.
The district's leadership team is also meeting on Aug. 1 to discuss ideas for how to best move forward. Preliminary discussions have included a proposal to put a temporary freeze on hiring non-teaching personnel (with the exception of special-education personnel that the district needs to replace, according to a staff report).
Wednesday's meeting will be held 4-6 p.m. at the district office, 25 Churchill Ave. Read the full agenda here.