1. Financial Long Range Planning Dr. Bruce Capron Honeoye Falls – Lima Central School District Livonia Central School District

2. Overview  Present a model budget  Identify key drivers of budget increases  Generate forecasts  Consider reserve spending and sustainability  Simulate the impact of changes over five years  Summarize

3. Purpose of Multi-year Budgeting  Generate focus on the things that matter.  Make common sense of the obvious.  Understand how today’s decisions propagate forward.  Anticipate icebergs.  Plan soft landings

4. Model Appropriation Budget

5. Size and Sensitivity Budget Component Percent of Budget ChangeImpact on Budget Required Increase in Levy Wages47%2%0.94%1.62% Health Care12.2%8%0.97%1.68% Debt Service10.4%1%0.10%0.18% Contractual + BOCES Expenses 8.3%1%0.08%0.14% TRS Pension6.0%2 Points0.73%1.27% ERS Pension2.2%2 Points0.21%0.37% Other Employer Expenses 5.0%2%0.10%0.17% Energy2.6%5%0.13%0.22%

6. Revenue Budget

8. Revenue Assumptions  Expense Driven Aid formulas remain unchanged.  Foundation + GEA Aid increase at 2X the CPI

9. Balancing the Budget 1.Gap = Budgeted Revenue + Reserves - Budgeted Expenses 2.What increase in the levy balances the budget? 3.Is this levy increase above the tax cap?

10. Salary and Wages

11. Salaries and Wages  Consider a 2.5% annual wage increase

12. Retirements and Breakage  Retire without Rehiring  Salary = $ 85,000  TRS = $ 13,813  FICA and Medicare= $ 6,522  Total $105,315  Retire and rehire an early career teacher  Salary = $ 40,000  TRS = $ 6,500  FICA and Medicare= $ 3,600  Total $ 49,560  Breakage = $ 55,755

13. Employee Demographics (Minimal Upcoming Retirements)

14. Employee Demographics (Significant Upcoming Retirements)

15. Other Factors  Review enrollment projections and carefully consider whether the position will be replaced.  If you are rehiring for this position:  What experience level is complimentary to your other staff?  Are you seeking second career teachers that have private sector experience?  What hiring practice will smooth annual breakage?

16. Salary Projections  Project 2.5% wage increase  Assume 1.0% savings from breakage

17. Teacher Retirement System

18.  TRS Employer Contribution Rate  Normal Rate15.85%  Expense Rate 0.27%  Group Life Insurance Rate 0.13%  Excess Benefit Plan Rate 0. 0% 16.25%

19. Investment Portfolio  62% Equity  28% Fixed Income  10% Real Estate Target ROA = 8%

20. TRS  Calculation of Normal Rates Normal Rate = Total Liabilities – (Assets + Receivables) Present Value of Future Salaries Normal Rate = 108.2 billion – (82.8 billion + 3.6 billion) 138.2 billion Normal Rate =15.85%

21. Teacher Retirement System

26. Employee Retirement Pension

27. ERS Pension Investment Portfolio  $160 billion  60% Equity  30% Fixed Income  10% Real Estate Return of 10.4% (3/13) 498,000 Active Members 381,000 Retirees

28. Employee Retirement System

29. Health Care Costs

30. Health Care Expenditures

31. Health Care Drivers  3% to 5% per year in increased general costs  1% to 3% per year in increased utilization (less healthy society)  1% increase due to technology  Cost savings from introducing advanced technology is not quite offsetting new product costs  Drug companies are focused on the multiple thousands of dollar per dose products even as many popular drugs are becoming generic

32. Health Care Growth (Average Annual Change in National Health Care Expenditures)

33. Why is the apparent rate of Health Care Inflation Slowing?  Health Care Inflation is driven by the macro economy. Key influencers are: 1.Inflation rate this year and inflation rate in the preceding two years. 2.Real GDP growth this year and real GDP growth in the preceding five years  Result  77% of the historical health care costs are explained by these macro-economic factors.

34. Health Care Projections

35. Health Insurance

36. Why not hope for low health care inflation?  Both health care and pension costs correlate with multi-year trailing averages that largely follow the economy.  Health care and pension costs tent to move in opposite directions  Low Health Care inflation -> Higher pension costs  Higher Health Care inflation -> Lower pension costs

37. What’s Worse?  What is more challenging to the budget?  $1 million in additional pension costs or  $1 million in additional health care costs? Health Care – the tax cap doesn’t go up with the cost of health insurance.

38. Energy, Contractual and Supply Expenses

39. Natural Gas Energy Information Administration www.eia.gov

40. Energy, Supply Contractual Expenses

41. Putting it All Together

42. Putting it all Together  Wages increase: 2.5%  Health Care increases:  6.5%-> 7.0% -> 7.5% -> 7.7% -> 7.5%  Pension costs follow projections  TRS: 16.25% -> 18.25% -> 18%...  ERS: 21.9% -> 20.9% -> 20.9% ….  Energy, contractual expenses and supplies increase with the CPI  CPI: 1.65% -> 2%...

43. Putting it all together

44. What do you do?  First, count the breakage from retirements.  Second, hope the legislative budget contains additional aid.

45. Impact of 1% Breakage

46. Impact of More State Aid (Foundation Aid Increases at 2.5X CPI)

47. Reserves and Fund Balance

48.  Fund Balance  Excess of Revenues over Appropriations.  Renewable Reserve Use  Ongoing use of appropriated fund balance?  Generate enough fund balance to maintain 4% Unassigned Fund Balance?  Non-renewable Reserve Use  Potential deficit spending spiral

49. But what about the $2 million in Restricted Reserves  What does it mean to the school if reserves are used to make up the budget gap rather than increasing taxes?

50. Recall the Budget that worked in most years Note that only the 2014-2015 year budget requires exceeding the tax cap.

51. Use of Non-renewable Reserves  Use $300k of reserves to plug the first year’s budget

52. Use of Non-renewable Reserves  Use $300k of reserves to plug the first year’s budget  Use $151k of reserves to plug the second year’s budget

53. Use of Non-renewable Reserves  Use $300k of reserves to plug the first year’s budget  Use $151k of reserves to plug the second year’s budget  Use $77k of reserves to plug the third year’s budget

54. Use of Non-renewable Reserves  Use $300k of reserves to plug the first year’s budget  Use $151k of reserves to plug the second year’s budget  Use $77k of reserves to plug the third year’s budget  Use $15k of reserves to plug the forth year’s budget

55. Multi-year impact of deficit spending  Using $300k of reserves in year 1;  Forces tax levy to the cap for the next three years and;  Requires $151k; $77k, and $15k of extra reserve expenditures to stop deficit funding

56. What about the $2 million in reserves (Scenario #2)  With $2 million in reserves, why shouldn’t the taxpayers have a year with no increase?

57. What about the $2 million in reserves (Scenario #2)

62. Explain to the taxpayers why you need to exceed the Tax Cap two years in a row for something done 3 years ago

63. So when should you use Non-renewable reserves?  When you have a plan to stop!

64. Sustainable Uses of Reserves  Fund first year start up costs for an aided program (e.g., BOCES aided software).  Bridge operating expenses until significant retirements occur.  Emergency repairs.  Retirement incentives.

65. What kinds of actions are not Sustainable?  Defer buying a bus.  Reduce expenditures with BOCES.  Cut expenditures on computers and textbooks.  Cut supplies and support so educational delivery is out of balance.  Eliminate capital projects Transportation Capital Aid -75% BOCES Aid - 65% 1:1 Textbook Aid – 100% Inefficient Building Aid – 78%

66. Multi-year Budgeting Planning for accelerating change!  Technology  Networks and access  Collaboration  Content Management and Leaning Systems  Assessments  Library and Information Subscriptions  Data sources and data analysis  21 st century skills

67. Summary  Multi-year budgeting exposes the consequences of current year decisions.  Allows schools to better manage reserves.  Provides an important tool for collective bargaining negotiations.  Helps the district manage public perceptions and expectations.