Facing an unexpected $3.3 million budget shortfall this year due to overly ambitious estimates of property-tax revenues, a majority of the Palo Alto school board said at an all-day retreat Thursday that it preferred addressing the problem by dipping into reserves rather than rolling back recent pay increases for district managers and administrators.

With the exception of Ken Dauber, board members voiced support for a staff proposal to retain the raises, make one-time expense cuts and dip into district reserves to balance the budget this year.

There was less agreement on how to address the impacts of the budgeting error on future years, in part because staff had not prepared detailed financial scenarios to quantify the potential problem nor prepared cost-cutting options.

About a month after discovering that property-tax revenue estimates came in about 3 percent lower than the district budgeted for, Chief Budget Officer Cathy Mak presented the board with a series of proposed next steps, including using $375,000 in funds allocated for new elementary-school teachers that weren't hired due to lower-than-anticipated enrollment growth; $175,000 from the district's Basic Aid Reserve fund; $1.2 million in bond funds set aside to update computers; empty a $463,000 unrestricted, undesignated fund balance; and spend just over $1 million set aside for professional development.

Next year, $500,000 would be taken out of the reserve and an additional $1.4 million in budget cuts would need to be identified to bring the district out of the red, Mak proposed.

While most board members characterized the budget shortfall as a "structural" deficit with significant implications for future years, Mak did not. She said unless property tax comes in below 4 percent "for a long period of time," the district isn't facing a structural problem. She did not present any financial analysis, however, to show how future budgets could be balanced with a 4 percent increase. Dauber criticized the proposed approach, saying that the staff's plan is fiscally irresponsible and defers rather than tackles head on the "hard choices" that are required to manage an ongoing, multi-million-dollar deficit.

Using dollars that had been budgeted to hire new teachers is inappropriate, Dauber said, especially given a projected increase in high-school enrollment and large secondary class sizes, as well as using rainy-day reserves in today's economically sunny times.

He proposed instead that the district rescind 4 percent salary hikes given this year to its non-represented employees, senior administrators and managers, as "me too" raises attached to those negotiated with the district's teachers and classified unions. Doing so would result in about $648,000 in cost savings, according to the district. The raises are also an ongoing financial commitment -- though the district did not enter into multi-year contracts with its non-represented employees like it did with its teachers and classified unions, the increased compensation would roll forward each year.

"I don’t believe that it's fiscally responsible to proceed along a path where we spend reserves now, rather than cutting expenses," Dauber said. "Spending reserves, borrowing money, not looking at compensation -- those things should be last resorts, not first resorts."

Similarly, school board candidate Todd Collins urged the board to "face the hard choices and discuss them openly, not just kick the can down the road." He opposed spending reserves and "borrowing" by using bond funds, pointing to the multi-million-dollar, cumulative deficit the district faces "under almost any plausible scenarios."

Collins gave the board copies of calculations he had done on his own to show the five-year, cumulative deficit the district faces based on different revenue-growth scenarios and teacher raises. Using the City of Palo Alto's property-tax projections -- around 5 percent for the next five years -- and giving no raises would result in a $12.6 million deficit, according to Collins. Assuming higher property-tax growth, at 7 percent, and giving 1 percent raises in 2017-18 and 2 percent raises for the next three years still results in a $4.6 million deficit, according to Collins.

The scenarios that Mak presented Thursday assumed no raises for the next five years, which Collins said is "just unrealistic, and would in fact be counter to our core values."

The topic of compensation surfaced several times Thursday. Board members requested that at the next budget discussion in two weeks, Mak provide multi-year forecasts that include 1 percent raises so they can better assess the impact.

Despite voting in favor of it in May, board member Camille Townsend again expressed her opposition to entering into multi-year teachers’ contracts because of how late in the year property-tax revenue is determined. (She said that she voted against them in closed session.)

"I cannot ever see us doing a multi-year contract again," Townsend said. "I think it is not fiscally responsible because we don’t know the numbers."

Board President Heidi Emberling defended the contracts, calling them an "innovation" that has helped teachers and staff plan ahead rather than receive retroactive raises, as they have in the last few years. She pointed to the up-and-down nature of property-tax growth that make it difficult to predict with 100 percent certainty.

"Despite the Monday-morning quarterbacking, no one has a crystal ball," she said. "We make the best projections we can based on the data we have."

Chris Grierson, principal of Duveneck Elementary School and president of the Palo Alto Managers Association (PAMA), also urged the board to consider the impact of rolling back raises for senior administrators and staff like himself. This year’s 4 percent increase "helps us support our own families better than we could before and as you are well aware, costs of housing, food and transportation are constantly on the rise."

He noted that administrators received their first paychecks for the 2016-17 year at the end of July and "most of us have made financial plans or commitments with this new compensation rate in mind," from childcare arrangements and college tuition to qualifying for a mortgage.

"A rising tide lifts all boats, and your recognition and gratitude for our collective work and commitment to our Palo Alto students, their families and community raised morale throughout our district," Grierson said.

None of Dauber's colleagues supported rescinding the administrators’ raises, though several expressed an interest in discussing at a future meeting possible changes to the district’s "me too" process for providing non-represented employees with salary increases.

Board members also debated the timing of the district's budget decisions. Dauber expressed more urgency, asking staff to produce a list of prioritized, possible budget cuts for the board to weigh and discuss by its next meeting, but a board majority agreed to wait to have that information by mid-September.

Staff stressed there will be three more public meetings on the 2016-17 budget over the next two months, and a special session in October dedicated to discussing cuts for the following year. Several board members also emphasized that cuts must be considered beyond the dais, with strong, inclusive community participation.

"We are going to need to make budget cuts. No one is dodging that," Superintendent Max McGee said. "Staff recommendation is to do this over two years so we have time to engage and have all stakeholder groups participate, so we can make the best decisions for all students."

And while Emberling said Thursday’s conversation was "thoughtful and deliberate," and Townsend said there is no need to be "alarmist," others urged stronger, swifter action.

"There needs to be a sense of urgency," Collins told the board. "This is not business as usual."

The board will next discuss the budget at its first regular meeting of the school year on Aug. 23.