PORTLAND PUBLIC SCHOOLS

PORTLAND PUBLIC SCHOOLS 501 North Dixon Street / Portland, OR 97227 Telephone: (503) 916-3200 / Fax: (503) 916-3110 Mailing Address: P.O. Box 3107 / 97208-3107 Email: superintendent@pps.k12.or.us OFFICE OF THE SUPERINTENDENT Jim Scherzinger Superintendent DATE: January 14, 2004 TO: FROM: RE: Board of Education Jim Scherzinger Superintendent 2004-05 BUDGET FRAMEWORK AND CHOICES Multnomah County Income Tax Averted a Crisis Last year at this time Portland Public Schools faced a funding crisis. On top of $36 million in base budget cuts, the state made a series of mid-year reductions that cut our school district revenue by another $21 million. In response, the School Board Finance Committee, the district s Budget Review Team, made up of a cross section of district staff including school principals, and the Citizen Budget Review Committee diligently examined every budget to find savings. To balance the budget, the School Board chose actions to best preserve the quality of our educational programs. Rather than laying off teachers, it saved approximately $7.15 million by cutting positions, reducing programs and services and capturing savings through reorganization. Only when Measure 28, a temporary state income tax, failed did I recommend a plan to cut 24 days from the 2002-03 school year and a number of programs, including outdoor school and spring sports. In addition, I announced a potential 2003-04 shortfall of over $50 million. Today our fiscal situation is improved. On May 20, 2003, the voters of Multnomah County passed a temporary three-year income tax, replacing the loss of school funding from the legislature. This means that our nearly 50,000 Portland students are able to attend school for a full school year. More than 600 teaching positions were preserved along with programs such as athletics and professional technical education. This incredible show of support during an economic recession is what makes our school district unique. Many people deserve thanks parents, especially HOPE, the group that worked diligently with city, county and business leaders and the School Board to put a local tax measure on the ballot Mayor Vera Katz and County Chair Diane Linn and their staffs who ironed out difficult details and crafted the measure volunteers who worked to pass the tax and voters who supported it. We also need to recognize the contribution of school district teachers and administrators. Several factors allowed 24 days to be Budget Framework 2004-2.doc

restored in the school year: additional funding from the city, an agreement with teachers to work for less pay, and an agreement with administrators to curb health care costs. The Revenue Outlook for 2004-05 - State Funding No Better Today Voters approved the county income tax to allow us to continue a full school year, maintain the 30:1 school staffing ratio, and to maintain other programs. Nonetheless, we still face financial challenges. The state funding situation is no better today than it was a year ago. In addition, we face declining revenue because of declining enrollment, a drop in our poverty population, and increasing cost pressures. This budget framework describes these effects and examines the options for balancing the budget in 2004-05. Our Aspiration for Each Student is High Each student must leave our schools prepared for college and the workplace. We know that students today face challenges that require higher levels of reading, writing, math, and problem solving than ever before. To meet this challenge we have developed a strategic vision and an aggressive Education Action Plan with five focus areas: literacy, high priority schools and students; mid-level and high school reform; communication and accountability; retention and development of high quality staff. Oregon schools have adopted accountability measures to show student progress. In five years, Portland Public schools has raised the percentage of its students meeting tough state benchmarks by as much as 32%. Over 84% of our third graders meet or exceed state reading benchmarks, up from 71% five years ago. The three-year Education Action Plan recognizes that achievement has risen dramatically for many students in Portland Public Schools. Yet there is more work to be done. Despite these success and improved student performance, not all of the students in the school district are making gains. Data indicate an achievement gap for low-income students, students of color and English language learners. Achievement is often higher for students at elementary rather than middle and high school levels. With a focus on excellence, equity and accountability, we must continue to lead the charge to improve student performance and eliminate the achievement gap. We have taken other positive steps for the future and laid the groundwork for change. The School Board has taken steps to strengthen community and financial accountability and to set clear, ambitious academic goals and measures The School Board aligns policy development and budget with academic goals and focuses financial resources on the classroom and student achievement The School Board implements internal and external audit recommendations to save taxpayers money; the Board is building internal audit capacity by hiring an internal auditor who reports to the Board; and the Board is building external audit capacity by working with the city and county auditors to schedule performance audits 2

We have a great school system and wonderful, dedicated teachers and staff who have accomplished a lot under less than optimal circumstances. We have laid the foundation for tremendous success. Our students are depending on us, and together we can and will move forward. 2004-05 Revenue Outlook State funding for education remains uncertain. Although the legislature passed a temporary tax increase, a petition put it to a statewide vote on February 3. If Measure 30, the statewide income tax, fails the state two-year allocation for public services will be at the same crisis level that prompted Multnomah County voters to approve the county temporary income tax for schools, health and public safety. Thus the county tax truly averts a potential crisis. The table below shows the forecast of General Fund revenue for next year 2003-04 2004-05 Budgeted Revenue Revised Revenue M30 passes M30 fails State School Fund 292.4 306.6 294.6 272.4 Multnomah County income tax 51.1 37.0 36.3 58.5 City of Portland 4.3 4.3 4.3 4.3 Desegregation property tax 7.4 7.4 7.6 7.6 Local option property tax 17.5 17.1 17.5 17.5 Multnomah ESD 8.3 8.3 7.7 7.0 Other revenues 9.5 9.5 9.5 9.5 Total General Fund Revenues 390.5 390.2 377.5 376.8 Notes: State School Fund includes direct state aid and local property taxes captured by state funding formula. This number may be less reliable than in past years in that the state has not yet produced an official estimate for next year. The estimate also assumes the district continues to accrue one month of the following year s payment into the forecast year. In general, the table shows that the county income tax insulates the district from changes in statewide funding levels for the 2004-05 school year. If Measure 30 fails, the county income tax revenue will replace the loss, assuming collections are sufficient. If Measure 30 passes, the county will rebate a portion of the income tax to local taxpayers. The county income tax, however, does not insulate the school district from revenue loss due to enrollment declines and other factors such as reduction in poverty or cuts in ESD funding. The following factors combined will cause district revenues for the 2004-05 school year to decline by $13 to $14 million: Enrollment for the 2003-04 was down by about 2,410 students. This will reduce revenue by nearly $14 million. The number of children in the district from low-income families declined in the 2000 census. In addition, the state appears to have administratively changed the way the poverty factor is calculated. This reduces revenue by $2.5 million. 3

State cuts in ESD funding due to equalization and statewide funding cuts reduce our direct revenue by $600,000 to $1.3 million, depending on the fate of Measure 30. The legislature dedicated a portion of State School Funds to high-cost special needs the students. The forecast assumes that Portland will receive approximately $2.8 million from this change. Normal growth in the local option and desegregation property taxes increases revenue by about $600,000. Finally, it is too early to predict the outcome of federal budget deliberations. Congress has not completed their work on next year s federal education budget. At this point it appears that federal No Child Left Behind funds will be about the same as this year while there may be a small increase in special education allocations. 2004-05 Expenditure Outlook The table below shows forecasted 2004-05 General Fund expenditures if costs do not increase from the level that will exist at the end of this year. 2003-04 Expenditure Budget 2004-05 Expenditure Forecast Personnel costs Base salaries 199.6 197.8 Other salary costs 10.3 10.3 Health insurance 43.7 45.2 Other benefits 49.7 49.3 Total before enrollment decline 303.3 302.6 Staff reduction due to enrollment decline -- -4.6 Total personnel costs 303.3 298.0 Services and supplies 66.4 66.4 Transfers (including PERS reserve) 16.6 16.6 Total General Fund Expenditures 386.3 381.0 The 2004-05 forecast assumes salaries as they will exist at the end of the year under our current labor agreement plus movement of one step for those eligible, continuation of health care costs at the end-of-year rates ($946 per month for most represented employees and $694 for administrators), no inflation in service and supply costs, and continued transfer payments at their current level. Forecasted 2004-05 expenditures are about $5.3 million smaller than budgeted for the current year. The major reasons are: Base salary expenditures for the current year appear to coming in less than budgeted, most likely due to retirements. The 2004-05 base salary figure assumes 4

the salaries paid at the end of the current year (i.e., including any increase paid during the year) plus the cost of a step. The forecast assumes a 60 FTE reduction in school staffing due to declining enrollment. Although the table assumes no increase in the end-of-year monthly health insurance costs, the annual costs are higher than the current year s budget because the end-of-year rates apply over a full twelve months. Cost pressures The school district faces costs pressures in many areas: Employee compensation The district spends 80% of its budget on the salaries and benefits of its employees. We are currently in or approaching labor negotiations with almost all its represented workers. Salaries and health care costs are a central item of discussion in each of these negotiations. Resolving these issues is the most important factor in creating a budget. Because we do not have contracts for next year, these costs are uncertain. Although the base estimate includes a step increase for eligible employees, this too is subject to negotiations. To get some idea of the potential costs, a 1% salary increase for all district employees would cost the General Fund about $2.5 million, including salary related benefits. Health care costs have been growing by about 20% per year. However, we do not have a reliable estimate of the growth to anticipate into next year. We currently pay $946 per month for most represented workers and $694 per month for administrative and management workers. If the school district continues to absorb cost increases of 20%, it would increase cost by about $6.1 million. Employee compensation is more than just a cost issue. For example, with city and county representatives, the District and the Portland Association of Teachers participated in a Compensation Committee established by our last agreement. The committee s analysis showed that the district s health care costs are high but our teacher salaries in many cases lag behind other metro area districts. The committee found the status quo to be undesirable and unsustainable. It recommended changing the current allocation between health care benefits and salary in order to make teachers total compensation package both balanced and competitive. Charter schools One new charter school (SEI) has been approved and four others are in the application process. This year about 350 school district students attend Portland Public Schools Charter Schools. Assuming growth of the existing schools and potential enrollment at newly approved schools adds about 400 students, costs will increase by about $2 million. 5

Inflation Service and supply costs continue to rise. In some cases, such as our student transportation contract, inflation factors are built in. Utility costs seem to be growing faster than general inflation. If utility rates grow 5% and other costs grow at 2%, General Fund expenditures would grow about $1.6 million Contingency The Board adopted a policy two years ago to build reserves to 3% of total General Fund expenditures about $12 million next year. We ended 2002-03 with a $3.5 million ending balance and budgeted to increase this to $7 million this year. Recent analysis indicates that, in addition to the budgeted increase, other savings will achieve the $12 million goal by the end of this year. This is reflected in the summary table in a higher beginning balance for next year. Remember, however, that although the forecast shows a $12 million balance for budget purposes, that the audited financial statements would still show a deficit due to the continued accrual of future state payments. The table below summarizes these estimates. Budget 2003-04 2004-05 No Cost With Cost Revised Growth Pressures* Beginning balance 2.7 3.5 12.0 12.0 Revenues 390.6 388.8 376.8 376.8 Total resources 393.3 393.3 388.8 388.8 Expenditures 386.3 381.3 381.0 395.5 Contingency 7.0 7.0 12.0 12.0 Total requirements 393.3 388.3 393.0 407.5 Net position 5.0-4.2-18.7 Notes: Revenue estimate assumes failure of Measure 30. * Cost pressure assumes 2% salary COLA, 20% health care cost increase, 2% general inflation, 5% utility cost increase, and $2 million for charter school expansion. The net effect is a potential shortfall of $4 to $18 million. Attached is a discussion of the options for dealing with this shortfall and other issues that are important in the 2004-05 budget. The decision making process Public input on budgets is crucial to the development of the Superintendent s budget recommendations to the School Board and the School Board s work in adopting the final budget. In January, the public is invited to a series of public meetings to discuss budget options for the 2004-05 school year. I will use input from these meetings to form my budget recommendations to the School Board. The School Board will then 6

hold a series of budget meetings in early February and will use public input to craft the budget for the 2004-05 school year. The meeting dates are listed below. For more information, you can call 503-916-3304 or log onto www.pps.k12.or.us. BUDGET MEETINGS: 1/20/04 7 8:30 p.m. Marshall High School 3905 SE 91st Budget Forum 1/22/04 7-8:30 p.m. Jackson Middle School 10625 SW 35 th Budget Forum 1/27/04 7-8:30 p.m. Grant High School 2245 NE 36th Budget Forum 2/11/04 6:30 9 p.m. Roosevelt High School 6941 N Central Budget Hearing 2/18/04 6:30 9 p.m. Wilson High School 1151 SW Vermont Budget Hearing 2/23/04 6:30 9 p.m. Blanchard Building 501 N Dixon Budget Hearing 7