How AISD builds a budget with no help – and a lot of harm – from the state
The Austin Independent School District's coffers have never been fuller. That's what you'd think if you just looked at how much property tax money the district is scheduled to collect over the next year. But between how much running a modern urban school district costs, how little the state puts in, and how much Texas pulls out, it's a minor miracle the lights stay on in AISD at all.
On Aug. 31, the AISD board of trustees approved a $1.15 billion budget for the 2016 financial year. AISD Trustee Ann Teich called it "a very typical budget. We're devoting a lot of money to salaries, we're devoting a lot of money to facilities." The basic budget remains the same as last year. The same buildings need to be maintained, the same curriculum needs to be taught, the same kids need to go in and out of the same doors every morning and every afternoon.
However, there have been some tweaks in the columns. With staff retention an eternal concern in Travis County's highly competitive education job market, trustees approved a long-overdue 3% pay increase for all staff, totaling $14 million. The bulk of that money came from staff reductions due to reduced enrollment, with total student numbers forecast to be down by roughly 1,000 this year. But while the district is responsible for fewer kids, it still has to keep the same classrooms open. Yet state cash is reduced because there are fewer kids in them. To counter that, the district is investing nearly $800,000 in a districtwide marketing plan, designed to recruit more students to AISD, rather than losing them to surrounding districts, private schools, or charters.
However, this year has been a particularly vexing one for AISD budget creators, thanks to the Legislature. During the most recent legislative session, there was some hope of reform. House Public Education Chair Jimmie Don Aycock, R-Killeen, proposed a $3 billion investment in public schools, in part to fill what remains of the $5.4 billion hole dug by lawmakers in 2011 during massive budget cuts. Even better for AISD, he proposed pivotal changes to how the cash is distributed between districts. If that had all passed, AISD would have seen a $48 million increase in state funding. Instead, after Senate opposition to the House plan, the Lege whiffed, increasing state dollars by only $1.2 billion, and with no structural changes. That $48 million AISD hoped for dropped to a $10.6 million rise in the basic allotment, which then shrank to $2 million after factoring in changes made to per capita payments. That's far from the $35 million that AISD Chief Financial Officer Nicole Conley calculates would be needed to get state funding back to 2011 levels. She said, "I don't see us really being made whole until the state looks at a significant fix."
That may be coming, with a long-running challenge to the state's school finance system finally reaching the Texas Supreme Court on Sept. 1 (see "School Finance at Texas Supreme Court," p.19.) However, even if the justices order immediate action, for the time being AISD must play the cards it's been dealt.
Dealing With A Deficit
The truth is, AISD has such a lousy hand that, if this were poker, they'd have folded years ago. True, administrators and trustees across the state struggle to keep the doors open and the lights on, but no school district in Texas has the budget problems that AISD has. The term used repeatedly is "perfect storm." Under the state's school finance system, expensive housing means AISD is classified as a Chapter 41 district. That means the state believes the district has more property tax money than it needs to educate its kids, and so this theoretical excess is sent to the state under the recapture system, aka "Robin Hood." Those recapture payments are nominally to support districts with less money and more expensive kids to educate. However, the cash goes into the state's general revenue fund, and is not actually dedicated to education spending. Moreover, unlike the bulk of the more than 300 Chapter 41 districts in Texas, AISD has big English language learner populations, special ed populations, and students from poorer backgrounds, all of whom generally require extra assistance and support.
Then there are what Teich called "rigidities in the budget" that, in combination, make AISD different. For example, it's one of only a small number of districts that pay Social Security for employees, worth $33 million a year (to the frustration of both the district and staff union Education Austin, most AISD staff will not contribute for long enough to claim the retirement benefits for which they and the district paid). Then there's transport: Even though it is a major urban district, because it's Chapter 41, it doesn't get any assistance from the state, so that's another bill to pay that its peers get subsidized. All of which makes budgeting a splitting migraine of a headache. AISD Board President Gina Hinojosa said, "It's confusing to everybody, and school finance starts off very confusing and hard to understand."
The philosophy of spending at AISD is simple: How do we pay for what we need to do? And that's need, not want. Chief Officer of Teaching and Learning Edmund Oropez admits that, if he had the money, he could make huge changes across the district: redesign classrooms as more collaborative learning environments, and fund innovative new programs both districtwide and on individual campuses. But, quite simply, his office doesn't have the millions in capital needed. Instead, he said, "We have to be really strategic, based on the priorities we identify at the beginning of the year." This year, investment in staff development on teaching reading and writing is topping that list. Oropez said, "Over the last couple of years, we've kind of been slugging it out on literacy. Our data's flat, or we've had incremental growth."
The good news for Oropez is that, while not what it could be, his budget didn't shrink. For that, he credited "the genius of [Conley]. She draws the line on what supports we need, so there's not been a cut in what is necessary to keep things up." Between a combination of asking people to do more with the same, and careful budget balancing, there's even been some cash liberated for new programs. The biggest development is the rollout of the district's new technology initiative. Oropez said, "That's going to touch all 6,000 teachers in every single classroom, so we're making sure we have the money and resources to be able to support distributing the devices, and making sure our teachers have adequate training." In 2013, voters approved $81 million in bonds to better integrate technology into the learning experience. Yet that only paid for hardware and infrastructure upgrades – now the district has to run it. However, Oropez said that the plan drove the spending, not vice versa. Knowing that the first devices arrive in campuses in December, staff calculated what it would take to get teachers and classroom personnel up to speed, then put a dollar amount to it. He said, "If you just say you only have $100,000 for [professional development], that may or may not be enough to do it."
Put all that spending together, and the headline budget number is that, yet again, the district will run at a very slight deficit. On Aug. 31, staff presented a finalized draft to the board of trustees that predicted income of $1.15 billion for FY 2016, and total spending of $1.152 billion. That means slightly more than a $1 million dip into unexpended reserves, but the numbers are a little more complicated than they seem.
School property taxes in Texas break down into two parts:
• Maintenance and Operations (M&O), which pays for day-to-day operations. At the beginning of August, the board confirmed that they would not be asking voters for a tax rate increase this year through a tax ratification election (TRE), leaving that portion of the rate at $1.079 per $100.
• Interest and Sinking (I&S), which covers bond payments and debts. Because this pays for construction and infrastructure bonds that voters have already approved in prior elections, the board would not have to ask voters' permission to raise that rate. However, this time around, they actually gave voters some tax relief. At that same August meeting, the board dropped the I&S rate two cents to $0.123 per $100 value.
Supplemented by state and federal dollars, M&O taxes account for the overwhelming majority of the district's general fund. However, rising appraisal values make those calculations very erratic. A year ago, Conley's staff forecast this year the district would have to go $30 million into the general fund balance to cover costs. By the Aug. 17 board work session, that had gone down to $10 million. However, as finalized numbers came in from the Travis Central Appraisal District, the board found itself with a $1 million general fund surplus. That's good news for Conley, who described spending the fund balance as "not a sustainable solution."
This wasn't the first time the district was prepared to spend general fund balances, but trustees broke with financial tradition when they approved the two-cent I&S drop. By doing that, they basically ensured that they will not have enough new tax revenue to cover this year's bond debts. So, for the first time they will go into the debt service fund balance, to the tune of $2 million. With $46 million in the bank, Conley argued that absorbing that loss was worth it for the broader benefit of cutting property tax bills. She said, "We're lowering the rate for taxpayers, because that's basically the right thing to do."
But – and there's a big "but" here – these revenue numbers are all only forecasts. Homeowners can challenge valuations, and then there are always people who simply don't pay up. Adding to the volatility is the city of Austin's current lawsuit against Travis County over commercial property appraisals. A ruling in the city's favor could completely change valuations in future years.
Recapture: Runaway Train
As for spending, the rampaging elephant in the room is recapture. Those Chapter 41 payments have gone from being a drain on AISD resources to a runaway train that swallows a disproportionate share of any property tax revenue increase. FY 2016 payments are up 55% from FY 2015 – compared to a 0.3% decrease in operating expenditure – and that exponential growth is forecast to continue. If the district's forecasts are accurate (and history has shown that the reality is often much worse), by 2019 AISD's Chapter 41 payments will rise to $363 million. That's 37 cents out of every M&O tax dollar going to the state.
The problem isn't just year-on-year recapture growth: As property appraisals grow, predicted payments rocket while the budget is being put together. At the beginning of the budget process for FY 2016, staff forecast a payment to the state of $228 million. By the time the numbers were seemingly finalized for the Aug. 17 board work session, with new appraisal numbers, that leapt to $268 million. By final budget approval on Aug. 31, that had jumped again, to $273 million.
All this money flows out into state coffers, with little assistance to fill the gap it leaves. Hinojosa said that, before the legislative session, there was vague discussion of a TRE as a potential solution to a worst-case scenario state budget. But once it was clear the Legislature wasn't going to significantly help or hinder the district, she said, "One hundred percent of the decision was because of how hard it is to sell a TRE to the community when so much of the money goes away."
In fact, the district is closer to holding a bond election in the next few years than a TRE, not least because it gets to keep all of its I&S revenue. This isn't about the district being stingy, just realistic. For example, the district took flack from conservative groups like Americans for Prosperity for using bonds to buy classroom computers, since the equipment will be outmoded before the debt is paid off. However, it's actually cheaper for the district and local taxpayers to pay with I&S money, which comes from bonds, rather than M&O cash, which comes from taxes, because that money isn't subject to recapture. Oropez said, "Ideally, if you had the cash, you could constantly do this on the M&O. But because this is Austin, we're going to have to go out for bonds." However, bonds are rare, and require voter support, and that's a risky way to fund what should be best practices in the classroom. Rolling out a big program like AISD's tech initiative is difficult enough, Oropez said: "Doing it on a shoestring budget is extremely challenging." Conley reinforces that such budget tactics are not a philosophical opposition to recapture: "Austin is a giving community, we want to pay our part, but not at the cost of kids in our community in need."
If the state doesn't act soon, AISD could face financial disaster. Lawmakers had a chance to do something this year but, as with that $3 billion increase, they whiffed. In addition to providing some upfront money, Education Chair Aycock's reforms would have given the district at least some recapture relief for the next two years. AISD Intergovernmental Relations Director Edna Butts watched closely as that plan failed, but she's more optimistic about the future because of the groundwork Aycock laid in explaining AISD's plight. She said, "I don't think people necessarily pay attention to our demographics because they see Austin as a big, beautiful, shiny, tech city." When lawmakers saw how many kids in Austin are English language learners, or live in poverty, she said, "They get it."
The big problem is that, unless the Supreme Court basically orders Gov. Greg Abbott to call a special session before 2017, those discussions will happen without Aycock, who has announced his retirement. Butts called his loss "huge." Calling him "global in his thinking, and a very fair person," she added, "He has so much integrity and so much respect among his colleagues. He gets the attention of the members because they trust him." But she believes that his willingness to start raising issues, without the threat of a Supreme Court ruling, has helped mold the discussion.
Moreover, there is a bipartisan coalition on the House Public Education Committee – including Republicans Dan Huberty, Ken King, and Marsha Farney, and Democrats Alma Allen and Harold Dutton – ready to pick up where Aycock left off. On House Appropriations, the Travis County delegation has two voices in Democrats Dawnna Dukes and Donna Howard, while Sen. Kirk Watson is now on the Senate Finance Committee. If they maintain those seats in the next session, as seems likely, then "there are some definite rays of hope there," said Butts.
There will also be a major new ally in the recapture battle. This year, Houston ISD writes its first check to the state, totaling $100 million, and that is expected to be a major issue next session, as Bayou City lawmakers learn firsthand what recapture means. And they may not be AISD's only allies when it comes to redefining its budget. In recent years, the concept of community schooling has gained real traction: That's where local government, social services, and nonprofits collaborate to help provide wrap-around services to a school. It's still in its early days, although results from test beds like Reagan High prove it's a model that works.
The downside is that there are distinct legal limits on cost sharing. For example, the city can provide family resource specialists, whose presence benefits the whole community as much as it does a single campus; however, it cannot simply write the district a check for teacher salaries. By the same measure, the city cannot build a school, but placing Wooten Elementary right next to Wooten Neighborhood Park, or Overton Elementary adjoining Colony Park, meant the district didn't have to pay for extra green space. So far, the dollar savings on these collaborations have been relatively small but, Oropez said, "The positive result of this is that it's forced us to seek out new partnerships, like with the city of Austin or with nonprofits; it's created new relationships for us, and we can pool our resources."
The greatest concern for the longevity of such initiatives is that the state isn't footing the bill, so the district and its allies often have to look to unreliable outside funding sources. Oropez said, "You may be able to do that for a couple of years, but you're living year to year." So no matter how creative the district gets, or how successful it is in teaching kids, at the end of the day all these innovations could fold up tomorrow. If the state doesn't find some way to truly support AISD and every other district around the state, Oropez said, "The out-years look scary."