Brett Shipp and Some Trustees Get an “F” In School Finance

Despite what you've heard, DISD is in great financial shape

Brett Shipp needs help. Actually, he may be beyond help. But I’m going to try to explain school finance to him one more time, since he seems determined to pretend to report on DISD. His latest example of journalistic malfeasance can be found here.

So, what you should do to prep for this post is watch the video above, cued to the 1:46 mark, for about 10 and a half minutes. (For some reason, I can’t get embeds to work right. If it cues to the wrong spot, just click this link.) It’s from this past Thursday’s board meeting, and it features DISD CFO Jim Terry, trustee Joyce Foreman, trustee Bernadette Nutall, and trustee Mike Morath talking budget stuff. Watch until Foreman gives my favorite quote of the year: “I don’t like being corrected when I know I’m right.” This segment will give you the background you need to read this primer, which will explain why Shipp’s story that DISD is in some sort of financial straights is complete bulsh.

(As an aside, a similar DMN story also quoted ignorant trustees about the same issue, but at least it added the correct information at story’s end.)

In fact, Brett Shipp’s fantasy segment has so much wrong with it, we’re going to have to break the first part of it down piece by piece. Let’s do this:

NEWS 8 INVESTIGATES
DALLAS — New questions are being raised about budget problems at the Dallas Independent School District. News 8 has learned the district is $43 million over budget in state and local funds.

Always love it when questions are raised! So generic. You might as well begin your report, “So anyway ….”

Also, I love the “News 8 has learned” portion. Oh, is that what you did? You learned this? You mean, by watching the board meeting? Or by watching the YouTube video above? Reporting gold star for News 8!

This is meant to shock you that DISD has a deficit of $43M. Now, if you’ve read any of my previous posts that go over school finance – like this one – you’ll probably think, “hmmm, I’ll bet it’s not that simple.” Spoiler alert: You are correct. Let’s continue:

Two nights ago, we told you the district had quietly laid off 85 employees because it had over-spent $10 million in federal funds. Now some board members says there are more questions than answers.

This is wrong in three ways. One, the administration announced the layoffs to trustees (which it is under no obligation to do) and to the employees (of course), so I don’t know what he means by “quietly.” I suppose he wants a press release any time positions get eliminated in this 21,000-plus organization. Two, the district did not overspend funds – it spent federal funds that had been (effectively) sitting for years, unused, in a savings account. Three, those funds have ZERO to do with the deficit Shipp is talking about.

This is going to take some explaining. As we’ve told you, there are four separate funding buckets for public school districts like DISD:

• General Operating – which pays for teachers, electricity, maintenance, buses, and any other operational item.
• Food Service – which pays for meals for kids.
• Debt Service – which pays down all the outstanding debt approved by voters in bond elections.
• Special Revenue Funds – largely composed of federal grants that supplement the General Operating budget.

The 85 employees who were let go were employed by Title 1 funds – federal funds that fall under the “special revenue” bucket. And the district didn’t overspend. Each year, any district that receives Title 1 funds should TRY to spend every dollar it receives. Because those dollars go to help poor kids learn! It’s just that, in recent years, the district has never managed to spend its entire allotment. It can then carry over the funds it did not spend to the next year. The fact that these funds carry over is great – it’s not a “use it or lose it” proposition. But the fact that the district isn’t spending these funds isn’t great, because kids aren’t getting the services to which they’re entitled. So if you have money left over, you have a quasi-one-time savings account of federal money. And you should do your best to spend that money on kids, because it doesn’t do you any good sitting in the bank. A smart trustee (if there are any) would look at the situation of these carryover funds being exhausted and think to themselves: “I’m glad they finally deployed all that cash to our kids.” A dumb trustee (of which there are several) would react: “I’m SHOCKED, SHOCKED that we’ve run out of federal funds.” Triple sigh.

Also, that money supplements but does not replace the general operating fund, which is what Shipp is saying is $43M in the red. (We’ll get to that.) Spending the remaining federal carry-over in no way affects the general operating fund, unless DISD decides to reallocate money from its general fund budget to pay for some/all of those 85 positions moving forward (which it can do but has not yet done – partially because it’s still waiting to find out just how much money it’s going to get from the state this year, which introduces even more fluidity into this supposedly finite deficit problem).

Let’s continue:

Six months ago, Dallas ISD’s finance director proclaimed that the district was in the best financial shape in its history. The question being asked now is: How do you go from accruing record surpluses to suddenly being in the red?

So glad you asked, Brett! For one thing, six months ago, Terry was talking about the last two independent audits the district received, which said DISD finances were in some of the best shape in the district’s history. For another, if you’ve accumulated a huge savings account (aka, the Reserve Fund Balance) – way more than the state says you need – and you decide (several months back) to intentionally dip into that savings account a small amount because of requests from trustees to help speed up building projects, then you’re not suddenly in the red. You’re intentionally drawing down savings to help kids.

Here’s the kicker: This isn’t your personal checking account, Shipp. Your general operating budget can be in the red and you can be in great financial shape. ESPECIALLY if the reason your general operating budget is in the red is because of a one-time charge of $43M that the board unanimously voted for just two months ago.

I know. It’s that simple. Hear me out, it gets better.

In the clip above, you hear Terry try to explain this to Foreman. Foreman is having none of it, because she doesn’t understand budgeting, and her goal is just to get gullible idiots to believe she has uncovered financial problems. Then Nutall starts to grill Terry on another matter before being told that they’re not even discussing the budget item to which she’s referring. Then we go to Morath, the person on the board who actually a) has a finance degree, b) reads the budget, and c) understands accounting. After pointing out to Nutall that the information she was seeking is already included in their trustee reports, he focuses on Foreman’s questions, which get to this same $43M deficit that News 8 “discovered.”

He points out several things. One, that because of budget reporting lag, this $43M-plus deficit is actually only true through March. (Actually, Terry points this out, but stay with me.) Two, that this deficit is almost wholly caused by a one-time grab from the general operating fund to pay for the “bridge plan” – which the board unanimously approved. (This is not a surprise. In fact, I broke down three months ago how the funding of this would affect each funding bucket.) Three, that this means the district should end the year with a $43M deficit, which will be covered by the Reserve Fund Balance – $342M the district keeps in reserve to cover things like this; again, think of it like your savings account.

But wait, it gets better! Morath points out (and Terry tried to point out to Foreman) that the district projects it will not end the year needing to take $43M from its reserves to cover that general fund deficit. It will only need to take $19M to $20M or so. Why? Because the district showed enough fiscal austerity this year to spend about $23M LESS than it had projected. So, you are $43M in the red, but you spend $23M less than you thought you were going to, and you end up only $20M in the red – which means your reserve fund is still damn strong at $320M at year’s end.

I should note that the real picture is more complicated than the exchange between Morath, Foreman, and Terry at that recent meeting. Foreman has been pointing out that the district’s budget has been in the red for several months, even before the bridge plan was adopted. So it can’t possibly be ONLY the bridge plan that put the district’s budget in the red. The only way to figure this out would be to go back through all the budget amendments and financial reports for the year – a task Terry hinted at in the exchange at the last board meeting but obviously couldn’t do right there. For your benefit, dear readers, I will point out the details and the timeline (you’ll note that the numbers below will differ slightly from Shipp’s; instead of using the actual numbers, I’ve been rounding down to correlate with his wrong numbers, because otherwise it would have been too confusing):

June 2014 — Budget adopted, budget is balanced (neither in red nor black).

August 2014 — $11M of increased expenditures authorized by the board (for counselors, testing coordinators, and repairs from hail damage). Now projected to end up in the red by $11M.

September 2014 — $7M of increased expenditures authorized by the board (largely an accounting move to close out expenditures started in the prior year). Now projected to end up in the red by $18M.

October 2014 — $7M of increased expenditures authorized by the board (the infamous “overhiring” fake scandal). Now projected to end up in the red by $25M.

November 2014 — $500k of increased expenditures authorized by the board (extra staff at Dade). Now projected to end up in the red by $26M.

December 2014 — No changes.

January 2015 — $500k of increased expenditures authorized by the board (more library books). Now projected to end up in the red by $26.5M. I’d have to consult the videos to be sure, but I think this is when Trustee Foreman started asking her questions about the finances and started regularly voting against the monthly financial reports. I guess she didn’t realize what the board approved up to this point.

February 2015 — $3M of increased expenditures authorized by the board (retirement payments for employees). But wait! This amendment also included $26M of extra revenue authorized to be received by the board (all that E-rate money coming in). So now the district is projected to be in the red by about $4M.

March 2015 — $44.5M of increased expenditures authorized by the board ($43M bridge plan, $1.5M for special ed bus monitors). This month also included an accounting change to reallocating $25M in expenditures into a special deferred maintenance fund, which ended up being balance neutral (i.e., just moving money into different categories). And it also included a change to start anticipating the savings from austerity achieved during the year, a $5M reduction in anticipated expenditures. With all that, now the district is projected to be in the red by about $43M. So, pretty much all the other changes have balanced out, and now we’re just looking at the net effect of the bridge plan.

April 2015 — $300k of increased expenditures authorized by the board (new school choice launch costs). Now projected to end up in the red by $43.5M.

May 2015 — $2.5M of increased expenditures authorized by the board (mostly carbon monoxide detectors and minor construction projects). Now projected to end up in the red by $46M.

June 2015 — News 8 has JUST LEARNED what the board has been approving all year. Kudos to Shipp for great investigative journalism.

The bottom line is this: The district is in a fantastic financial position, and continues to spend less than it takes in. It is, in fact, exactly where the district said it would be when it argued for trustees to pass the bridge plan. It’s just that some trustees – and poor, sad Brett Shipp – aren’t smart enough to understand how school finance works.

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