Cash reserves nearly depleted, Harford school officials begin to wrestle with next budget

The Aegis

Decisions to use more than $10 million in cash reserves to balance the current budget and impending medical insurance cost increases caused a depletion of the majority of the Harford County Public Schools fund balance by the start of the current fiscal year on July 1, according to the school system’s latest annual financial report.

The school system has less than $4 million in reserve to weather a major unforeseen financial hit, such as a major storm that damages facilities or a spike in fuel or utility costs or a building’s systems failure, according to the financial report which was briefly presented to he Board of Education at its meeting Monday night.

It’s something some HCPS leaders warned about in June when the $462 million operating budget for the 2018-19 school year was enacted, and the accelerated depletion of the so-called fund balance – the amount of cash on hand at the end of each budget year that has not been obligated to expenditures in the next year – will impact the next school budget, officials say.

As a consequence, Superintendent Sean Bulson, who took office July 1, already has instituted an informal spending and hiring freeze, and he warned Monday that spending and possible position cuts will be coming as he develops the budget for 2019-20 in the coming weeks.

“We will still need to make cuts… I don’t see circumstances where we won’t have to make cuts,” Bulson told the board.

He singled out having to rely more and more on the county to meet rising costs of doing business – and less and less on the state, whose funding for Harford and many other mid-sized districts has lagged, as one culprit of the current financial squeeze. The other is spiraling health care costs for employees and retirees, he said.

More data, more questions

Bulson said he is trying to produce a more data driven analysis of HCPS finances that will be more transparent to the board and to the public and said he hopes to present information to the board at its session Nov. 19.

He said he has met with representatives of the school system’s five employee unions to discuss financial issues and to hear their concerns, and he urged the school board members to aid him in the process by telling him “what do you need to know to help us make decisions as a board.”

“How do we do this together?” the superintendent said. “We have a great team; I know the solutions are there.”

The board members spent nearly 90 minutes offering suggestions of information they would like to receive by the planned Nov. 19 presentation.

Among the questions were how much health care will cost in the next budget both in dollars and as a percentage; the amount of savings to HCPS if the current 90 percent average payment for health insurance premiums was reduced – causing employees to pay a higher percentage; and historic data on the percentage of the total county budget allocated to HCPS.

Other suggestions included a breakdown of positions by classroom versus administrative; analysis of how past position cuts have affected classroom sizes and specific programs; have past cuts been applied equitably across the county; has the increased emphasis on adding special education positions to reduce private placement of those students resulted in a net savings; what are anticipated costs for new students coming into the system who need special services such as English as a second language; how many students are riding buses compared to the capacity of the bus.

In all, the 10 board members offered some 35 suggestions/questions for Bulson and his staff to address in less than a month. Bulson called it a “good conversation.”

Several board members praised the superintendent for involving them more in the early stages of the process and for asking about their priorities.

The superintendent was urged by Board President Joseph Voskuhl to present as much of the information as possible during the Nov. 19 meeting, rather than in piecemeal fashion over several meetings.

Bulson hedged when board member Robert Frisch asked when the superintendent will present his recommended budget to the board. His predecessor, Barbara Canavan, typically had her budget to the board in mid-December, giving the board about two months to act on the budget prior to its submission to the county executive.

Because of his desire to involve the board, as well as the school community and public, more on the front end, Bulson said completion of his budget could “take a bit more time; I would like to play it by ear.”

“I want to do the hard up work front,” he said.

Reserve shrinks

The annual financial report shows the school system ended the last school year on June 30 with a fund balance of $28.3 million, about $6.2 million less than a year earlier. The $6.2 million was used as revenue to balance the 2016-17 budget.

Most of the $28.3 million has already been used, according to school officials and the financial report, including $10.9 million to balance the current budget — with most of that used to meet negotiated employee pay increases; $3.1 million for prior encumbrances such as contracted services, supplies, materials and equipment; $8.2 million for health insurance rate stabilization; $1.2 million for a future health insurance premium call; and $1 million for emergency fuel reserve.

Those obligated expenses left the net available fund balance at $3.76 million, according to the report.

Several of the obligated items, such as the health insurance rate call, fuel reserve and health insurance rate stabilization funds recur year to year, according to HCPS Manager of Communications Jillian Lader, who responded Tuesday via email to questions posed by The Aegis regarding the fund balance for which answers were provided by the HCPS finance department.

“The [fund balance] assignment remains from year to year until it is either utilized to cover expenses for which it was assigned – requires board action and county approval to appropriate the funds; [or] the assignment is removed at which time it would revert back to unassigned fund balance – requires board action,” according to the email.

The health insurance rate stabilization reserve is a requirement through the school system’s participation in the Harford County Public Entities Healthcare Consortium along with Harford County government, Harford Community College and Harford County Public Library, according to the email. The consortium performs as a self insurance fund.

There is a memorandum of understanding that outlines the responsibilities of the participating entities, including that each entity keep an amount in a rate stabilization fund that is held and managed by county government and how the reserve is to be calculated and that, in accordance with accounting standards, it be kept as a fund balance receivable, HCPS finance officials explained.

Liabilities ballooned

The annual financial report was presented to the school board by Deborah Judd, assistant superintendent for business services, and William Seymour, of the accounting firm SB & Company LLC, which handled the report’s audit portion.

Seymour said the school system received a “clean audit,” and its financial procedures are “reasonably free of material misstatement” with “no deficiencies or weaknesses with internal controls.”

But Seymour also highlighted that because of recent changes in accounting rules for public bodies, the Harford school system’s total liabilities have ballooned to almost $1.4 billion, primarily because of money not being set aside to cover the cost of so-called other post employment benefits, or OPEB, for retired employees, most prominently their HCPS funded health insurance plan and the payout of unused sick leave as negotiated by union contracts.

Set off against the value of buildings and other physical assets, HCPS net liabilities at the end of the last school year stood at $418 million, according to Seymour.

School board members, some who had been briefed about the report, didn’t have any questions for Seymour or for their fiscal staff.

Seymour said later that the forward payment of OPEB expenses is an ongoing issue for governments and school systems.

“There have been a number of studies about how it affects governments,” he said.

Voskuhl, the school board president, also acknowledged OPEB is a problem for HCPS, but the same holds true for other school systems.

“Besides,” he added, “the county doesn’t give us any money to pay for it.”

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avought@theaegis.com

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