All five Palo Alto school board members agreed during a special meeting Wednesday afternoon that finding the most fiscally and educationally sound path forward from a sudden $3.7 million budget shortfall, due to lower-than-anticipated property-tax revenue, must include careful consideration of the ongoing impact of the revenue drop beyond just this year.
Multiyear budget projections were absent, however, at Wednesday's study sesssion, though several board members said they had made such calculations on their own based on the district's 2016-17 budget, which was adopted in late June.
Chief Budget Officer Cathy Mak said that a multiyear forecast would not be provided until the board's next discussion of the budget in August.
"I'm looking forward to getting closer to what we think the projections are," said board member Camille Townsend. "What are the real numbers? What is the structural, ongoing debt? We really do have to see what the nature of the ongoing problem is."
Echoed board member Melissa Baten Caswell, "We need to figure out if this is a structural problem or a one-time problem."
Wednesday's meeting was billed by district leadership as a time to more fully understand how the Santa Clara County Assessor's Office's property-tax projection came in this month far lower than the district had budgeted for and an opportunity for board members to suggest how to address the resulting budget deficit. The actual revenue shortfall was $5.2 million, but with the elimination of a planned $1.5 million one-time bonus to employees, the result is the $3.7 budget gap.
Wednesday's discussion, however, centered more around process than ideas for where budget cuts can be made.
Given that a driving factor for the decrease in property-tax revenue was $1.1 billion in exempt property from ongoing construction of the Stanford University Medical Center Project, several board members suggested closer collaboration and better communication with Stanford. The project represents the second largest exemption in the state, according to Santa Clara County Assessor Larry Stone.
Trustees also suggested closer collaboration with the City of Palo Alto, which Baten Caswell noted was able to anticipate the billion-dollar exemption.
Board members directed Mak to find out how many more years the district should expect large exemptions due to the Stanford project, which first broke ground in 2012 and is expected to be completed by 2018. They also asked her to produce different scenarios for future years of property-tax growth, weighed against salary increases promised in the district's new multiyear teachers contract.
Leslie Braun, a former longtime college adviser at Palo Alto High School, called for more "tempered" revenue projections given the inevitable size of Stanford exemptions and the timing of when the district receives concrete information about property taxes on July 1, after the district's June deadline for adopting the budget.
"I believe that a more conservative approach to any business analysis by both our staff and our superintendent is imperative," she told the board. "I would rather read about the need to re-budget because of an unexpected windfall rather than an unexpected shortfall."
Mak said the district had historically been "very conservative" in its property-tax projections, but the board's adoption of the three-year teachers contract this spring led to higher-than-usual assumptions about the rate of increase in secured-property tax revenues, which provide about 75 percent of the district's revenue, in order to achieve balanced budget projections.
The district first projected an increase of 11.5 percent for the current year, followed by 9.4 percent and in 2017-18 an increase of 8.4 percent. The adopted budget relied on an adjusted estimate of 8.67 percent growth for the 2016-17 year and 7.83 percent for the 2017-18 year. The district intended to use the City of Palo Alto's estimates "in the 5 percent range per year" for 2018-19 through 2021-22 on secured property only, a staff report states.
"Bear in mind, 2016-17 is the first year that we have a multiyear contract," Mak said. "In past years, we have used very conservative numbers in our adopted budget because we know we don't have the raises in the budget."
In response to a question from board member Ken Dauber, Mak said the 2017-18 estimate would need to be revised to the 5 percent to 5.5 percent range.
Superintendent Max McGee, who participated in the meeting remotely via Skype, said that the district will reopen negotiations with its teachers and classified unions to discuss a 3 percent raise promised in the third year of their contracts (2017-18). The change in property-tax revenue also automatically triggered a safety-net condition in the 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.
While some board members defended the multiyear contracts, others repeated concerns they had previously voiced about the budget implications. Dauber, the only member to vote against the contracts, again lamented that using most of a $8 million surplus in the 2015-16 budget to give teachers a 5 percent retroactive salary increase left the district "without the flexibility we might need to handle whatever surprises we might have."
Townsend reiterated that although she voted for the contracts, she had felt "uncomfortable" agreeing to three years of raises. (She said, however, that she had voted against the contracts in closed-session discussions.) It was an unwise decision for a tax-reliant Basic Aid district that receives property-tax estimates and other financial information late in the school year, she said.
Mak and McGee have preliminarily suggested that the district not transfer $919,000 to the district's Basic Aid Reserve Fund as one means to make up for the lost revenue. Several board members questioned that proposal, given a board policy that requires the district to maintain a reserve equal to at least 10 percent of its general fund.
"It's important for us to know if this (deficit) is recurring or not recurring," Vice President Terry Godfrey said.
Baten Caswell, too, asked for Mak to return with multiyear projections that show the impact of the tax shortfall without the district dipping into reserves.
Dauber criticized the idea outright.
"Reserves are for a rainy day," Dauber said. "It's not raining. It's sunny."
Given this year's 5.5 percent property-tax increase, he said, "We should not be in position where we are going to be using reserves because at some point we're going to need those reserves for an actual downturn."
He urged the district to look at cost savings, such as rescinding a recently approved 4 percent raise for managers and administrators, which kicked in on July 1.
Board members did not discuss in detail Mak's and McGee's other proposals for how to backfill the deficit, which include pulling $1.2 million from unrestricted, undesignated funds in the budget; $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; dipping into the reserves; and putting a temporary freeze on hiring non-teaching personnel (with the exception of special-education personnel whom the district needs to replace, according to a staff report).
The district does not intend to cut funding that has already been approved to lower class sizes or support full-day kindergarten, according to a staff report.
Wednesday was the first of several meetings the district plans to hold regarding the budget. The next will be at a previously scheduled board retreat on Aug. 11.