Budget Work Session Presented by: Mark Mathers, Chief Financial Officer Mike Schroeder, Budget Director September 25, 2018

Agenda Summary of Annual Budget Process (“Budget 101”) Review of State’s K-12 Funding Process How does WCSD assemble its budget Review of FY18 General Fund Results Initial Trends for FY20 Budget Budget Process for FY20 / Update on Priority Based Budgeting Legislative Initiatives/Issues FY20 Budget Timeline

“Budget 101”, Part A State Funding Model for K-12

Overview of State Funding The State determines the funding level for school districts for the upcoming biennium. A statewide per pupil funding amount is derived based on a series of assumptions. This funding is commonly called the DSA (Distributive School Account) funding. In addition, other State programs are funded. Some of this funding may be included in the DSA along with the per pupil funding, others are in separate budget accounts. K-12 school districts have to compete with State departments and needs (prisons, welfare, healthcare, etc.) for General Fund funding.

Historical Costs of School Districts State Funding Model NDE uses actual expenditures for all school districts from the first year of the prior biennium Historical Costs of School Districts “Rollups” (progression of staff in their salary range) are typically added. COLA’s and other inflationary factors are only sometimes added. + Inflation Factors Some enrollment growth is also factored in. + Enrollment Growth Based on these three factors, NDE compiles total projected expenses of all school districts

Per-Pupil Funding After expenditures are compiled, District revenues outside the per pupil funding are estimated. These revenues include 2/3 of property tax, gov’t service tax, opening fund balances, federal revenue and franchise tax. Outside revenues are deducted from the estimated expenditures to arrive at a net expenditure. This net expenditure is the Total Basic Support. The Total Basic Support is divided by the estimated enrollment. The result is the statewide Basic Support Per Pupil funding.

Per-Pupil Basic Support Funding FY2017-18 Projected Expenditures for all K-12 Schools (based on historical expenses + inflation) $3,599,692,205 Less: Outside Revenues of School Districts (2/3 of Property Tax, GST, Federal Revenue) (790,632,822) - Total Basic Support provided by State $2,809,059,383 Weighted Enrollment Projected by State 476,338 ÷ Statewide Basic Support per Pupil $5,897

How Does the State Fund the DSA Account (Revenues inside the “Nevada Plan”) This chart shows the Total Required Support, which includes Regular Basic Support, Special Ed., and CSR. FY 2017-18 = $3,143,893,185

Marijuana Taxes Wholesale Tax – 15% of FMV rate set by Dept. of Taxation Set by initiative (2016 State Question 2) After covering Taxation’s cost of administering the program and local governments’ costs, the remainder is required to be deposited to DSA FY18 revenues = $27.3 million versus $18.9 million budgeted Because it is deposited to DSA, it is difficult to determine if the tax simply supplanted K-12 funding or actually increased funding. Like other DSA revenues, any additional revenues above what is budgeted simply reduces the State’s General Fund obligation to K-12 Retail Tax – 10% of sales price Set by statute, is in addition to Wholesale Tax Set by statute to be deposited to State’s Rainy Day Fund FY18 revenues = $42.5 million

How Do Additional DSA Revenues Affect School Funding? Assuming that projected enrollments are accurate, any additional revenues that flow into the State like marijuana taxes or LSST sales tax just reduces the amount funded by the State General Fund. Any Increase in Marijuana Taxes or LSST Decrease in State General Fund Support + $50 million - $50 million

How Do Additional DSA Revenues Affect School Funding? The chart below shows the primary funding sources for the State’s Total Required Support of $3,143,893,185. The chart below shows the impact of additional marijuana taxes and LSST. The pie stays the same, but the State’s General Fund amount is reduced.

Impact of Additional Revenues Because the funding of K-12 is set up for the State to receive any additional revenues like LSST, we do not receive any benefit from a growing economy in Washoe County.

Historical Use of State General Fund For K-12 Education As other revenues have increased, the percentage of the State’s Gen. Fund budget devoted to K-12 is decreasing. This includes categorical grants funded by the State’s General Fund. It does not include federal grants or programs that are passed through to districts, however.

“Budget 101”, Part B How is WCSD’s Budget Built?

How Does WCSD Build Its Budget Expenditure Budget Staffing Allocations and Operating Cost for Schools Support/Central Service/ Operations Reconcilation Process (Cost Reductions) Enrollment Projections Proposed Budget Revenue Budget Per-Pupil Basic Support Revenues Property Taxes GST + Other Revenue

Added together, these costs comprise our “Base Budget” Expenditure Budget Enrollment Projections Staffing Allocation Guidelines (WCSD) Additional Resources for Title/At-Risk, SpEd, etc. School-Based Staffing & Student Support Historically, WCSD has used incremental budgeting (last year’s budget + inflation) Moving to Priority Based Budgeting Central Services, Operations & School Support Added together, these costs comprise our “Base Budget”

General Fund Revenues $458.5 million in FY 17-18 Basic Support Guarantee per Pupil   $5,677 per pupil x 64,040 students = 363.56 million Less Local Revenues: Sales Tax (L.S.S.T.) $ 192.02 42% 1/3 of Property Tax 35.57 8% State Distributive School Acct. (DSA) 131.83 29% Adjustments 4.14 1% Total Basic Support Guarantee 79% State's Special Appropriation 5.00 Outside Nevada Plan 2/3 of Property Tax 71.13 16% Government Svcs. Tax/Other 23.77 5% Total External Sources 94.90 21% Total 458.46 Inside Nevada Plan

School Districts’ Funding Dilemma Barring additional revenues due to enrollment, we must make up any shortfall of the State’s funding model. Funded by the State WCSD Cost Increases Step Increases (+2%) COLA’s (?) Health Insurance (+10% in FY19) Costs of New Schools ($3 million) Health Insurance (+3.6% in FY18 & 4% in FY19) The State has not funded COLA’s since FY09.

Review of FY18 Results

FY18 General Fund Results Revenues exceeded the FY18 original budget by $1.1 million primarily due to extraordinary growth in GST (motor vehicle fees). Compared to the FY18 original budget, and not including an amount budgeted for a potential property tax settlement, total costs not including encumbrances were $12.97 million below budget. Deficit Excess of Expenses (not incl. encumbrances) -2.41M over Revenues Encumbrances that carry over to FY19 * -3.02M Expenses and Commitments over Revenues -5.43M *Encumbrances effectively reduce an agency’s available fund balance, so they are shown here.

FY18 General Fund Results *Other Category does not include the amount budgeted for a potential property tax settlement.

FY18 Results Moving Forward In FY18, the District achieved $12.97 million of savings, or $9.95 million if you include encumbrances. The FY19 budget incorporated $9.16 of base budget reductions and vacancy savings to reflect a reasonable amount of continued savings in these areas. Even if we see an exact repeat of FY18-level savings in FY19, we would expect a budget deficit (shortfall) in FY19. Both the FY18 and FY19 budgets included millions of recurring cost reductions. Despite this, the District continues to have a structural deficit, which requires reductions in FY20 and FY21 unless we receive additional State funding or a restructuring of the Nevada Plan.

Fund Balance for General Fund Based on unaudited estimates for FY18, the General Fund’s ending fund balance is estimated to be $40.9 million, or 8.9% of actual expenses. However, because of $3 mil. in encumbrances and carry-over, the available ending fund balance will be less than $39 million.

Initial Trends for FY20 Budget

FY20 Early Budget Assumptions Revenue Budget LSST +5% (Decreases DSA) Property Taxes +4% GST +5% Per-Pupil Basic Support - ? (Legislative year) Enrollment Projections = Estimating Flat Growth Budget Process to Address Ongoing Structural Deficit Reconcilation Process = (Continuing Structual Deficit) Expenditure Budget Staffing Allocations and Operating Cost for Schools = Flat Support/Central Service/ Operations = Additional needs offset by reductions Rollup Costs +2.1% Medical Insurance +10% Basis Adjustment -$2 million New Schools +$3.1 million

Enrollment History Projected enrollment forms the basis for allocations and budgeting of teacher and other school-based positions, as well as determining Basic Support revenues from the State. For the FY19 budget, we built in a flat enrollment assumption, which is the case for the first four weeks of school.

Estimated Cost Increases in FY20 Item Estimate Covered by DSA Known Cost Increases Salary Rollup Cost (2.1%) $ 8.9 Yes Health Insurance (10% est. based on current trends) $ 4.8 Partially Salary Basis Adjustment (Savings) ($ 2.0) No Net Costs of New Schools $ 3.1 No* Subtotal $ 14.8 Unquantified Cost Increases* Salary Increases (COLA’s) – still to be negotiated** Unknown Health Insurance Savings resulting from RFP Partially – see above Legislative Impacts PERS Rate Increase * These costs will need to be funded through a combination of growth in local revenues, increases to the per-pupil Basic Support Guarantee, and future budget reductions. ** For every 1% of COLA, the estimated cost across all bargaining units is $4.2 million.

Incremental Operating Costs of New Schools (in millions) For new schools, only the incremental additional operating costs are shown. These costs include the additional administrators, office support, custodial, maintenance, library, and clinical staff based on staffing guidelines, as well as utilities costs. Certified positions such as teachers and counselors will follow students from the schools where they are currently enrolled and are not an additional cost.

Budget Process for FY20 Budget and Update on Priority Based Budgeting

FY19 Budget – Where are our costs? Direct Instruction (Regular Instruction, Special Programs, Vocational Programs, Co-curricular Program) $292,464,286 School Support (Student Support, School Administration, Instructional Staff Support) $83,460,244 Operations & Maint. (Operations, maintenance and student transportation) $64,209,431 Central Services (General Admin and Central Support) $30,787,696 Focus of first phase of Priority Based Budgeting

Priority Based Budgeting Timeline Task/Step Timeframe Kickoff January 2018 Development of Program Inventories January - February Identification of Results and Definitions Results – begun in April Definitions – begun in May Board final approval in July Costing May - June Department Scoring of Programs July Department Scoring of Program Attributes August Peer Review Scoring September - October Final Reviews October

Priority Based Budgeting Determination of Lower Priority Programs Is the program mandated? If so, can we reduce costs? Is there a growing demand for the service or does it reach a vulnerable population? Can we reduce service levels rather than cut program? Can we consolidate services or oversight to achieve efficiencies? Can fees or grants cover the costs of providing the service? What costs can be cut versus small allocations of positions? Can we apply technology or identify work-arounds to reduce costs?

Additional Areas for Analysis Continuation of GFOA’s Best Practices in School Budgeting Smarter School Spending Tool – GFOA’s tool to identify potential areas of savings, supplemented with additional cost benchmarking Take Home Vehicles – in progress Athletic Transportation Fees – forming team for analysis Continued critical examination of expenditures

Legislative Initiatives and Issues

Legislative Initiatives/Issues School funding is the #1 issue of NASS. In addition to inadequate funding, there are other issues related to the State’s funding model and funding process. Timing – districts have little time to adjust their proposed budgets after per-pupil amounts are released Local Control – need to increase flexibility within categorical funds Lack of partnership between school districts and State budget office Later this fiscal year, we will present a calculation of what our required Basic Support per-pupil amount needs to be in order to balance the General Fund budget.

FY20 Budget Timeline

GFOA Best Practices in School Budgeting FY19-20 Budget Timeline Sept thru Dec 2018 Board Budget Work Session (Sept 25) Priority Based Budgeting (PBB) Scoring & Final Review. Follow up with departments (Oct-Dec) Budget Data Collecting, Smarter School Spending & Other Analysis Budget Forms to Schools and Departments Jan – Mar 2019 Governor’s Recommended Budget (Jan) Budget Data Collecting Legislative Session Begins (Feb 4) Summarize PBB Results Craft Resolutions for Structural Deficit Board Budget Work Session (Feb) Budget Community Forums (Mar) April - May 2019 File Tentative Budget (due April 15) Public Hearing on Tentative Budget and Approval of Final Budget (May 28) File Final Budget (due June 8 if not already approved) June – July 2019 Legislative Session Ends (June 3) Update Budget Based on Legislative Approvals Approve Amended Final Budget June 25 (due July 3) GFOA Best Practices in School Budgeting PRIORITY BASED BUDGETING (PBB) ALIGN BUDGET TO STRATEGIC PLAN Staff Input, Board Workshops and Community Forums ADDRESS STRUCTURAL DEFICIT 37