Structural Deficits: Are Your Eyes Glazed Over Yet?

As I shared last week, the best estimate of the East Penn School District’s revenue for next year has dropped by $6.1 million– or about 4% of the budget– as a result of the pandemic.

The district also began the year with a $15 million fund balance. A number of people have asked me– rightly– why the district doesn’t simply use this fund balance to meet the shortfall our schools are now facing.

Great question! Unfortunately, the answer requires getting into the weeds a bit on how public school budgets work. If you want to avoid these weeds, then here’s the quick and dirty answer: The district can– and likely will– use some of this fund balance to meet the current crisis, but using too much actually creates even bigger problems (and higher taxes) in the future.

If you don’t mind a few weeds, let me take a shot at a more complete answer:

The $15 million fund balance is pretty much like the district’s savings account, and has been built slowly over time through careful planning and conservative budgeting. Doing so greatly benefits both our schools and taxpayers.

Some of it, called the ‘assigned fund balance,’ has been deliberately set aside for large expenses the district knows are coming. For example, we know that in the next few years the district is going to have to replace part of the roof on Shoemaker Elementary, a project that will likely cost about $630,000. The heating system in Eyer is old and inefficient, and will cost about $2.5 million to replace. Coming up with this money all at once would be difficult. So the district saves a little bit each year to pay for these big expenses, much like you or I might save a little bit each month to pay for repairs on our own car or house. Of the $15 million fund balance, $8.5 million is ‘assigned’ to projects like this.

The remaining $6.5 million is ‘unassigned fund balance,’ and is kept as an emergency fund for unanticipated expenses. For example, if a storm blows the roof off one of the district’s ten buildings, this fund balance would be available to make the repairs, or rent space in a temporary building, or whatever else was necessary to allow the school to continue functioning.

And if ever there was a time to use emergency funds, it would be now– right? Alas, it isn’t so simple! Spending fund balance on emergency needs is generally fiscally responsible only when used for one time expenses: storm damage, an unanticipated furnace failure, etc. The problem is that most budgeted schools’ expenses have to be paid regularly, year after year; things like employee salaries, bus transportation costs, the electric bill, etc. Using fund balance to pay for these recurring costs creates what economists call a structural deficit. And this is where using fund balance in an emergency– if not done carefully and conservatively– can actually create a bigger, even more costly crisis in the long term.

To understand why, think about the $6.1 million dollar shortfall in East Penn’s current proposed budget for next year. Let’s say the district decided to make up that shortfall by using the $6.5 million unassigned fund balance to pay the $50,000 salary of 120 of its employees. The math looks appealing at first: $50,000 x 120 = $6 million, which the district has in its fund balance. No new taxes. Problem solved, right?

Weeeellll, only kinda. Because the math doesn’t account for where this money is coming from. Next year the district is still going to need those employees to teach classes, supervise students, maintain buildings, and all the other work that it takes to educate kids. But now the unassigned fund balance has only $500,000 left, enough to pay only 10 of those original 120 employees. The result? School taxes need to spike in the future to make up for the shortfall. This is why allowing a structural deficit in the budget can lead to bigger problems down the road.

Given the severity of the current economic crisis, I suspect the district will be forced to spend some of its fund balance in order to continue offering the basic educational opportunities our community expects and deserves. Good financial management means we have this useful cushion and bridge to (hopefully) better times. But we should all understand that spending fund balance on recurring educational costs now is a temporary solution that we will have to pay for in the years to come.

2 thoughts on “Structural Deficits: Are Your Eyes Glazed Over Yet?”

    • The district administration will propose cuts to the board at our May 11 meeting (which I will report out the next day on my blog and newsletter). Any necessary cuts would be finalized in June, when the final budget must be passed by law.


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