Seeking to eventually eliminate the Howard County Public School System’s ongoing health fund deficit, the Board of Education on Nov. 7 unanimously approved a request to use $15.2 million from the system’s unassigned general fund to shrink the shortfall.
A final approval, however, must come from the County Council. Use of the general fund money, which does not have a designated use, according to the school system’s website, would lower the deficit from $39.2 million to $24 million and wipe out the general fund balance.
School system officials requested the school board ask the County Council to treat legislation as an emergency item to allow for the withdrawal, according to Darin D. Conforti, executive director of budget for the school system.
The health fund deficit is rooted in an imbalance in the school system’s employee health and dental fund, resulting from funds being taken across seven years to pay for major expenses, including salary increases and the elementary school model program, as the Howard County Times previously reported.
Howard schools’ health and dental fund began to shrink in 2011 and in 2016 began showing a deficit.
The school system’s 2019 Comprehensive Annual Financial Report showed the health fund deficit increased from $37 million in fiscal 2018 to $39.2 million in fiscal 2019. As a result of not paying down the deficit, the school system received an adverse opinion in a yearly report from CohnReznick, a public accounting firm headquartered in New York, on Oct. 31.
An adverse opinion in the report has the potential to affect the county’s AAA bond rating, according to CohnReznick.
“Staff recommends this supplemental budget action to demonstrate immediate commitment to begin remedying the underlying causes of the adverse audit opinion,” Conforti said.
As of Tuesday, no emergency legislation fulfilling the school board’s request had been made. The council has one final legislative session for the calendar year Dec. 2.
Colette Gelwicks, a special assistant to County Council Chairwoman Christiana Mercer Rigby, said for emergency legislation to be established, ”It first needs to get the justification it is emergency legislation and we don’t have that yet.”
“One of the primary reasons for the adverse opinion was the fact in [fiscal 2019] we were unable to reduce the deficit at all,” said Jahantab Siddiqui, chief administrative officer for the school system, during the Nov. 7 school board meeting.
“While we had the intent, we talked about it; we said we wanted to reduce the deficit ... we did not demonstrate the ability to do it, so this would be a strong step in the right direction.”
In the 2020 fiscal budget for schools, Howard Superintendent Michael Martirano proposed to use $10 million of one-time funds from the school system’s general fund balance to reduce the deficit. The County Council-approved budget, however, used the $10 million to pay for other recurring expenses.
“In general, adverse opinions over financial statements are very rare,” said Jim McKinney, an associate chair and clinical professor at the Robert H. Smith School of Business at the University of Maryland. “Adverse opinions only occur after management or leadership have refused to adopt changes that the auditors feel are necessary to properly represent the correct position of the entity being audited.”
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For fiscal 2019, health care claims were $14.2 million over the school system’s budgeted amount of $130.6 million, according to a school system memo. The school system was able to offset all but $2.2 million of the $14.2 million through additional revenue, rebates, adjustments and surplus amounts, according to the memo. The remaining $2.2 million is tacked on to the deficit.
“As stated, this [requested] budget action is an important first step, but staff will be developing a plan that comprehensively and incrementally eliminates the deficit over a number of years,” Conforti said.
The plan will “required collaboration with the county,” and it will be presented as such during the upcoming budget cycle, Conforti said.
In 2018, the school system used the one-time funds to stop the deficit from growing, after then-County Executive Allan Kittleman recommended a one-time payment of $11 million to start reducing the health fund’s red ink.
The funds were used to pay the yearly health fund obligations, but not to reduce the deficit.