Navigating Budget Uncertainty

By Jim Schiele

Plan for Inflation

Economists from Morgan Stanley Research have released a report that projects inflation to rise two and a half percent (2.5%) in 2025. I recommend districts assume a three percent (3%) range for at least the next two years.

This may sound excessive, but economists are predicting higher inflation and I would urge you to build in allowances for inflation to rise above predicted rates. As budget adoption grows closer, these ranges will need to be revisited to reflect the current economic climate.

Plan for Recession

Goldman Sachs has raised the odds of a U.S. recession to 45 percent (45%) last week. However, under the current Texas school finance system, the possibility of a recession should not significantly impact state aid.

However, one impact a recession could have is a decrease in net taxable property values, potentially impacting impact ongoing capital programs. In the last recession of 2008 to 2009, real property values declined leaving several districts with authorized debt they could not issue. In some cases, those districts had to turn to special financing techniques for the debt that proved more costly.

Consult with your financial advisor and ask for updated financial forecasts that indicate what level of declines in property values would impact your ability to issue debt.

Plan for New Legislation

With school funding bills pending in the state legislature, it is difficult to predict the final outcome of this proposed legislation. Final bills are not likely to be passed until the end of the session in early June. There may be special sessions on the horizon, which only shortens the period a district would have to determine the impact on operations.

Considering the impact of each $100 increase in the basic allotment results in an increase to the state budget of $1.9 billion, we may not see increases over $250 per student. In addition, lawmakers may tie increases in basic allotment to required teacher pay increases.

At this point, I recommend including no increases in revenues until the legislation passes both chambers of the legislature and is signed into law. When the outcome becomes clearer, you can make more accurate provisions of the impact of any basic allotment increase.

Plan for Cuts in Federal Programs

The federal government supplies roughly 10 percent (10%) of the state’s overall annual funding for K-12 education, including a wide range of programs to support the education of the neediest student populations.

The future of federal education funding is uncertain, or may be tied to promises of program changes. Programs managed by the U.S. Department of Education could move to the states. These major changes to education structure are difficult to predict at this time.

I recommend holding programs at the same levels as prior years for now, unless the district is aware of specific data that would cause their funding level to change.

Summary

Budgeting in the current year is far more difficult than any budget year I can remember.  The best rule when setting up your budget:

– Don’t count on any additional revenue until it becomes law. Model the impact so you can be ready to respond, but don’t include those figures in your proposed budget.

– Be conservative with expenses. For large expenses such as utilities and insurance, decide now what the budget will be for those categories.

– Include a factor for inflation, as it is likely to rise. Engage your financial advisor and bank now for their advice.

– Evaluate the salary market for your district.  In competitive markets, you may need to include salary increases to keep staff. Be prepared to include that in your proposed budget.

– Look ahead to budget items in the planning stages, such as major system overhauls or new buildings. Make sure you include these in your budget or project when these could be started.

It’s never easy to navigate budget uncertainty, so be sure to ask for help if you need it. Contact me here with any questions.

Jim Schiele is Linebarger’s School Financial Consultant. He offers free assistance to Linebarger school district clients as they navigate budgets and meet financial deadlines. He can be reached at [email protected].

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