At its May 1, 2013 meeting, the board had approved development of a four-year budget. Looking at that period from 2014-2017, McDaniel told the board on May 15 that she hopes to identify $6.99 million in structural cuts in the first year of that four-year period. That’s a slight increase from the $6.88 million in structural changes that McDaniel targeted in her previous budget briefing, delivered at the board’s Jan. 16, 2013 meeting.

If the $6.99 million in structural changes can be identified in that first year, it would eliminate compounded, projected deficits over the four-year period that would total $34.45 million. [.pdf of 2014-2017 budget estimate] The projections do not factor in a possible major bond proposal that the board is considering.

The approach to addressing this $6.99 million target depends on whether the county moves ahead with a major bond proposal that’s in the works, to cover the county’s pension and retiree healthcare obligations. [See Chronicle coverage: "County Board Debates $345M Bond Proposal."] If the board does decide to bond for those obligations, McDaniel said, then the goal in 2014 is to reduce operating costs by $1.83 million, cut $100,000 from outside agency funding, and realize $5.06 million in cost savings from bonding for obligations for the county’s pension and retiree heathcare.

If the board decides not to bond for those obligations, however, then McDaniel said that most of the $6.99 million would need to come from a reduction in operating costs, as well as $100,000 in cuts to outside agency funding.

Both scenarios assume an additional $2.4 million in revenue for 2014. It’s expected that will be achieved from an increase in property tax revenues, as property values in the county climb.

McDaniel told the board that she and her staff need direction in terms of setting priorities and identifying core services. She indicated that the county can no longer provide the broad range of services that it has in the past.

The board held its first budget retreat on March 7, 2013. Commissioners will convene for a second retreat on May 16, starting at 6 p.m. at the county’s Learning Resource Center at 4135 Washtenaw Ave., near the county jail complex. The meeting is open to the public.

For 2013, the county’s financial staff is now projecting a $818,999 shortfall for the year. That amount is lower than the $3.03 million shortfall that was originally projected for 2013. The county had anticipated covering that $3.03 million by tapping its fund balance, but it’s now expected that the county will need $2.21 million less than that from the fund balance to cover the shortfall. The projected fund balance at the end of 2013 is expected to be about $16 million.

This brief was filed from the boardroom of the county administration building, 220 N. Main in Ann Arbor. A more detailed report will follow: [link]

The county works on a two-year budget planning cycle. In late 2011, commissioners set the budget for 2012 and 2013. However, because state law mandates that the board must approve the budget annually, commissioners voted in December 2012 on a budget “affirmation” for 2013, making several adjustments to the $102.8 million general fund budget. This year, they’re beginning the two-year cycle anew, planning for 2014-2015, with a longer-term view through 2017.

At the Jan. 16 meeting, financial staff provided preliminary estimates that show a general fund deficit of $3.93 million for 2014, which translates to 45.9 full-time-equivalent employees. That’s followed by projected deficits of $4.88 million in 2015 (56.9 FTEs), $6.53 million in 2016 (76.4 FTEs), and $9.27 million in 2017 (108.1 FTEs). McDaniel stressed that the projected deficits reflect what would happen if no action is taken. In addition, the FTE figures were merely a translation to show how many employees would hypothetically be affected in order to balance the budget – it’s not a policy decision to have layoffs, she said.

The projections include an assumption of only minor increases – 1% annually – in property tax revenues, lower state funding, and the same level of fringe benefits for employees, with no across-the-board salary increases. However, the projections assume that step increases and longevity pay would be reinstated for union employees.

The budget presentation also included targets to tackle a $6.88 million structural deficit in 2014. If that happens, “we’d be done – we’d have no deficit” going forward,” McDaniel said. The goal is to generate an additional $1.2 million in revenue, reduce operating costs by $2.96 million, cut $100,000 from outside agency funding, and find $2.62 million in reductions to employee compensation and benefits. In that regard, McDaniel noted that 327 employees currently have what’s called a “Cadillac” health care plan. Under new federal health care laws, the county government will pay a 40% tax starting in 2018 if those plans remain in place.

McDaniel noted that for 2012-2013, the county overcame a $17.5 million deficit – but only about $7.3 million of that came from structural changes. Yousef Rabhi, the board’s chair, noted that even though the $6.88 million target is lower, the cuts will be a challenge because many services are already cut to a minimal level.

McDaniel also floated some questions that commissioners should consider in their upcoming deliberations: (1) Do current budget allocations have the impact that commissioners desire? (2) Should the general fund be used when there are federal/state revenue reductions in non-general fund programs? and (3) What community area(s) can the county least afford to impact any further?

The board has set a planning retreat for Thursday, Feb. 21 at 6 p.m. – to be held during its regular working session – to talk about budget priorities. Update: The retreat has been rescheduled for March 7 at 6 p.m.

This brief was filed from the boardroom of the county administration building at 220 N. Main in Ann Arbor. A more detailed report will follow: [link]

AAPS board member Christine Stead, left, with Jane Landefeld, who is director of student accounting for the district. (Photo by the writer.)

The first session, held in December, focused on affecting state funding through legislative advocacy, and resulted in board approval of a detailed set of education funding principles that will be presented to state lawmakers for their consideration. [.pdf of funding principles]

At the second session, held last week, trustees brainstormed potential routes toward enhancing revenue at the local level.

In addition to continuing to advocate for funding changes at the state level, options suggested for local revenue enhancement included: increasing private giving; securing additional grant funding; running another enhancement millage campaign; licensing school logos on apparel; improving customer service; leveraging business partnerships better; continuing to develop new programs; and allocating funding for more robust and targeted marketing strategies to increase enrollment.

Finally, the board also acknowledged the need for some spending cuts in addition to increasing efforts at revenue enhancement.

Structural Funding Deficit

The fiscal environment faced by AAPS is similar to districts across the state of Michigan. The revenue sources that fund school districts have consistently fallen short of the total expenses for school districts – resulting in a structural deficit.

At the board’s December study session, trustee Christine Stead led the board in discussing a report on education funding recently issued by the non-partisian public policy research group Citizen’s Research Council of Michigan (CRC).

Stead highlighted the series of factors presented in the report that have led to reduced state funding for education in Michigan. The state’s School Aid Fund (SAF) receives revenues from a combination of taxes on: purchased goods (34%); personal income (14%); property (42%); business (5%); and other sources (5%). In contrast, the state’s general fund is primarily funded through personal income and business taxes.

According to the CRC, Stead reported, Michigan has been in a consistent recession since 2000, which has caused each of the funding elements of the SAF to be impacted dramatically. Stead noted that in 1994, Proposal A – which linked school funding to statewide pooled property tax values – was passed with the assumption that property values would continue to rise. Instead, as property values have instead declined, Proposal A has led to a decline in property tax revenue , as well as a drop in business tax revenue due to the major reorganization of the auto industry. Likewise, the monumental job losses across the state have caused decreased spending on consumer goods, as well as an overall decline in personal income.

For the past couple of years, Stead explained, losses in the SAF have been somewhat mitigated by one-time infusions of federal grant money through the American Recovery and Reinvestment Act (ARRA), which will run out in 2011. “A lot of people talk about that funding cliff that we’re going to experience,” she said. “This is that cliff.”

At last week’s study session, AAPS interim superintendent Robert Allen expressed concern that the current surplus in the SAF would be used to mitigate the $1.8 billion deficit in the state’s general fund. Allen also pointed out that pension costs are rising due to the large number of workers leaving the state retirement system. He explained that AAPS had planned for a 1% increase in mandated employer contributions to the Michigan Public School Employees Retirement System (MPSERS), but that it is now anticipating a possible 4-6% increase.

The CRC report cited above notes that in 2000, MPSERS had 2.5 active employees per retiree, while in 2009, that number had dropped to 1.6. Regarding budget planning for 2011-12, Allen noted that while the district “does not want to focus on the highest number out there and look like [it's] trying to pad,” keeping MPSERS funded is a challenge faced by school districts statewide. “With folks leaving the state,” he said, “there has to be an increase to meet [defined benefit] requirements.”

Trustee Irene Patalan asked Allen how AAPS compares to other school districts in terms of its response to state funding challenges. Allen responded that many districts have spent down the entirety of their fund balances, and have already had to lay off staff. Though AAPS has dropped below its targeted fund balance of $15 million, he said, the tough decisions made by the board last year have allowed the district to make payroll without borrowing from the state, and without having to go through with significant teacher lay-offs.

Revenue Enhancement

Allen opened up the Jan. 19 study session on revenue enhancement by asking board members for direction as he and his administration begin to craft the district’s 2011-12 budget. He asked them to discuss their expectations of two newly created staff positions at AAPS – a grantwriter, and a business partnerships coordinator. He also solicited their thoughts on how to best work with the Ann Arbor Educational Foundation, craft marketing strategies, and set enrollment targets. “Hopefully we can get some direction,” he said, “so you’re not surprised when we bring something back.”

Stead noted that Gov. Rick Snyder has expressed interest in moving to a two-year budget cycle, and asked the board to consider how budget gaps over the next two years could be mitigated by bringing in money instead of just making cuts. Noting the structural deficit, Stead argued, “We know that every year, we have $4-6 million to cut … We are not doing enough to plug the gaps. We are not doing enough to raise revenue.” She encouraged the board to be both more creative and more aggressive, asserting that, “At some point, we need to start taking control of our environment.”

Both trustees Andy Thomas and Deb Mexicotte pointed out the difficulty of making up the deficit each year, cumulatively. Mexicotte called it “a daunting task,” but Stead persisted, “We can do this – we just have to think about it differently.”

She said the board should look at grants, enrollment, business partnerships, and private giving to start, and set revenue targets based on anticipated cuts over the next two years. Some board members questioned whether the board had enough information to set measurable goals at this time, but discussion continued. The resulting brainstorming session generated the ideas, concerns, and tentative suggestions reviewed below.

Revenue Enhancement: Private Giving

Invited to the table was Wendy Correll, executive director of the AAPS Educational Foundation (AAPSEF), to discuss private giving. Correll reviewed joint efforts being made by the AAPSEF and AAPS, particularly with two new AAPS staff members – grants and volunteer coordinator Chris Barry, and business partnerships coordinator Annette Ferguson. The district’s director of communications, Liz Margolis, added that the goals and vision for the new positions, along with how they will tie into the communications department, will be presented to the board’s planning committee in February.

Correll argued that it is important to understand the unmet needs in the district, and to think strategically about priorities. She noted that sometimes parents, teachers, and students have different needs, and applauded the needs assessment currently being conducted by Barry.

The AAPSEF raised $331,000 from the community for the 2010-11 school year with a marketing budget of only $35,000. Correll said she is confident the foundation can raise another $330,000 this year. In response to a question from Thomas, Correll explained that the AAPSEF has shifted from funding “innovative” programs to funding “proven, excellent” programs above and beyond the state-mandated curriculum. These could include fifth grade instrumental music, the elementary environmental sciences program, and the elementary world language program.

The mission of the AAPSEF is aligned with the AAPS mission, and spreads resources over all students in all schools. Stead suggested that, in addition to supporting the AAPSEF, the district could develop another path to private giving for people who are interested in funding something specific, and work to make such contributions more equitable.

Revenue Enhancement: Grant Funding

Thomas argued that the cumulative nature of the budget deficit meant that relying on grants was a “trap” that the district should not fall into. Allen agreed, saying the district had to be “very careful with grants” and should avoid funding staff positions with grant money. Grants can be helpful, he said, for one-time purchases or investments that last at least five years.

Trustee Susan Baskett pointed out that a lot of grants are only for seed money, and that institutions sometimes need to have matching funds. She also noted that there are costs to applying.

On the flip side, Stead argued that with the recent hiring of a grantwriter, AAPS should be able to demonstrate a return for the investment in that position to the community. Trustee Simone Lightfoot concurred, “The reality is that grants are there. There are things that we’re already doing and money out there for that – we just have to get it, to go for it.”

Margolis responded that Barry has already applied for a number of grants for which the district has not previously applied.

Revenue Enhancement: Enhancement Millage

Michigan’s tax law, in the form of Proposal A, does not allow individual school districts to call for millages to support their general funds, but does allow for such enhancement millages at the county level. At the December study session, the board had briefly discussed how to mount a new campaign toward passing a countywide enhancement millage. Then, Mexicotte had suggested that a millage could be proportionally distributed according to the percentage of voters in each county municipality who voted in favor of it.

At last week’s meeting, both trustees Glenn Nelson and Thomas and brought up the idea of millages again. Nelson reminded the board that the special education millage would be on the ballot in May, and that running another enhancement millage was an option that could be explored at the local level.

Thomas argued that working to pass another enhancement millage, such as the one that achieved a majority of votes in the district, but that failed countywide last year, was inevitable. “Again, just because it didn’t pass before,” Thomas pointed out, “doesn’t mean it couldn’t be approved in the future.”

Stead requested that AAPS administration provide two two-year budget projections with scenarios corresponding to passage or failure of the countywide special education millage.

Revenue Enhancement: Licensing Agreements

Margolis reported that AAPS is considering entering into a licensing agreement with Advantage Sports, a new, local high-end sporting goods store that will include a “Varsity Shop” to sell apparel for local sports teams. Margolis said the store approached AAPS and would be responsible for enforcing the license, while the district would make 10% of all apparel sales revenue.

Currently, Margolis said, the district is going through the process to trademark the logos for each of the three comprehensive high schools. “This is somewhere we definitely have to go,” she argued, saying that eventually such agreements will reach beyond athletic departments to music and other school groups.

Trustees responded positively to the idea, and suggested that Margolis speak to representatives at the University of Michigan regarding such licensing. Margolis said she has already been in touch with the UM athletic department.

Revenue Enhancement: Customer Service

Margolis also argued that AAPS needs to become a “customer service district.” She asserted that the district has a long way to go in this regard, and that it will require the ability to talk about the families served by AAPS as customers.

Mexicotte agreed, saying that delivering customer service should be thought of as a measurable employee responsibility. She suggested that tasks like updating information in Power School – software for student information management – and answering e-mail could be part of employee evaluations. Baskett added that the district should also enact measurable goals for schools, such as answering the phone by the fourth ring.

Correll agreed as well, asking whether students get eye contact when they walk into a school, do they get choices, and can they have tours? She argued that parents feel like consumers, and their perception that they be received like consumers is important. “Individuals take education very personally,” Correll pointed out. “People carry their K-12 experiences with them into their 70s and 80s.”

The board discussed how customer service goals could be incorporated into the strategic plan, how the district could get the customer service model to penetrate throughout the organization, and the importance to training staff to apologize to family-customers when mistakes are made.

Mexicotte challenged the trustees to model good customer service behavior, and to take personal responsibility for getting students the best experience. “We can step it up,” she said.

Revenue Enhancement: Business Partnerships

Correll suggested that one way to measure the value of business partnerships would be to assign a monetary value to volunteer time. For example, she said, if it would cost $12 to have a tutor, and the district coordinates 25,000 hours of volunteer tutoring, that would bring $300,000 into the district.

Baskett suggested that perhaps business partnerships could offset some of the district’s marketing costs.

Revenue Enhancement: Program Development

Lee Ann Dickinson-Kelley, AAPS interim deputy superintendent for instruction, urged the board to maintain a broader vision, and to never think the district cannot continue to improve, as much as there is to be proud of already. “We need to always be thinking – what is our development strategy, not just our revenue strategy,” she advised.

Nelson agreed that the board needs to take ownership of its programs, and that “what we do in terms of programming really matters.” He argued that the work AAPS has put into changing the social climate of the district’s high schools, along with the construction of Skyline High School, had a downward impact on enrollment at local private high schools, which stabilized in 2008 after growing through the 2000s.

Nelson suggested reaching out more deliberately to the growing Middle Eastern population to see how schools can be made more inviting. Dickinson-Kelley mentioned the possibility of creating a program focused on Arabic language, but said such an idea would take time to develop.

Allen noted the importance of making program decisions based on sustainability. “There are some good programs,” he said, “and we have been able to be very creative … but you want to bring forward programs you can really sustain.”

Revenue Enhancement: Enrollment & Marketing

Board members put forth a number of ideas focused on increasing enrollment, including: recruiting students who live in the AAPS district but who are currently attending local charter and private schools; increasing School of Choice enrollment for students who live outside of the AAPS district; and increasing the district’s marketing budget overall.

Nelson acknowledged that while there are good data from charter schools on where their students come from, it’s not easy to tell the district of origin for students attending local private schools. Still, he offered 3,700 as a rough estimate of the number of students who may be living in the AAPS attendance area and choosing not to attend AAPS schools. If each student brings with them roughly $10,000, Nelson said, every 1% of that pool, or 37 students, could mean an additional $370,000 to AAPS. So 100 of these students, less than 3% of the potential, could bring AAPS $1 million.

Nelson argued that increasing enrollment should be a priority, and Thomas agreed. “I like the enrollment piece,” he said, “because it eliminates the need to renew, like we would have to do with grants.”

Nelson argued that it is important to collect data on why some in-district families choose not to attend AAPS. Baskett noted that some charter schools pick up students not based on performance, but on how parents and students feel and are treated. Dickinson-Kelley relayed that 45 students left AAPS overnight when a local charter school opened – simply because of its location directly across from a neighborhood of Pittsfield students. But, she added, many of those families have since returned to AAPS.

Nelson suggested that marketing targeting current charter school families should emphasize how only 22% of charter school teachers have three or more years of experience. In that area, he suggested, AAPS could use the idea of “experiencing expert teachers” in targeted marketing campaigns to different areas of the district.

Thomas asked if the district does exit interviews, and AAPS director of student accounting, Jane Landefeld, responded that they have done so in the past, but that the interviews have not yielded any real insight into families’ decisions for leaving. Some of them moved, she said, while a handful had problems with an individual principal or school, but there were no identifiable trends. Landefeld also suggested that some families who choose local charter schools don’t realize those schools are not part of the AAPS – which is demonstrated by the fact that they still call AAPS with problems or concerns.

Landefeld then briefly reviewed the district’s efforts at recruiting out-of-district students through a Schools of Choice (SOC) program for the 2010-11 school year. The goal of the SOC program was to bring in 150 students, she reminded the board. Of the 125 applications AAPS received, all of which were approved, only 78 enrolled.

Landefeld explained that the biggest issue was that families with siblings who were not in the grades targeted by the SOC program could not enroll all of their children. This year’s SOC program allowed for students to enter AAPS only in kindergarten, first, or sixth grade. She also noted that transportation was an issue for some families, and that other families applied to multiple districts and then ended up not choosing AAPS.

Allen said that as AAPS considers offering SOC for the upcoming school year, it is reflecting on the challenges faced this year, and might consider allowing sibling enrollment in specific schools with capacity in needed grades. Landefeld noted that it is important only to allow students to register for schools and grade levels for which there is excess capacity, to prevent the district from needing to hire more teachers, thereby increasing costs.

Thomas suggested that the new Mitchell-Scarlett-UM partnership could become a magnet school in the same way that the new Washtenaw International High School (International Baccalaureate program) might be a draw for in-district students currently attending local private schools. Nelson said his vision is consistent with that of Thomas, and suggested that once the new Mitchell-Scarlett-UM partnership is off the ground, people will wonder, “Why isn’t this bigger?” [For more details on the partnership, see Chronicle coverage of the board's Dec. 8, 2010 meeting.]

Stead argued that in order to compete effectively with private schools, marketing should focus on what the district already has in place. She suggested that all AAPS schools hold open houses. Baskett agreed, saying, “We need to toot our own horns.” She suggested creating a single sheet that outlines the district’s specific marketing plan for each AAPS program, including the IB school, the WAY (Widening Advancement for Youth) program, and the Options Magnet. Baskett also suggested that the marketing budget might need to be increased.

Mexicotte agreed, saying that the board has to be “aspirational” when setting the marketing budget rather than feeling paralyzed. She pointed out that enrolling seven new students would bring the district $70,000. “We know we have a great product,” she said. “We can’t be too worried about spending $100,000 to put ourselves out there.”

Patalan added that while marketing costs might be prohibitive, the district could certainly afford for board members to be ambassadors on a personal level. She suggested, “[What if we] challenged ourselves that we were personally going to meet with people who are not in the schools but could be, and talk to them about AAPS?”

Revenue Enhancement: Cost-Cutting

Lightfoot suggested, “We have to prepare our community to lessen their expectations.” She proposed, for example, that students could be taught to share computers instead of getting one on each desk. AAPS, she said, is seen in the rest of the state as “the poor little rich district,” and students should be taught to be resourceful as preparation for when they leave the enclave of Ann Arbor.

Lightfoot then asked about the appropriate time to begin discussing specific cuts, saying, “I know it’s always a touchy subject.” She acknowledged that while it’s important to focus on the revenue side, “at some point, we have to surgically plan cuts.”

Margolis noted that the district has done such a good job of making cuts that many parents haven’t felt their impact yet, and “think that we are crying wolf.” Stead countered that if students and parents start to feel cuts, the district will lose families, conceding, “We’re going to have to do a mix of cuts and revenue enhancement. We know we have cuts.” The question, she argued, is what degree of magnitude will be needed in terms of cuts, and how can AAPS build a revenue strategy to counterbalance them? She also noted that she wouldn’t want to send a message to the community that AAPS doesn’t have high hopes for the impact of the AAPSEF.

“Regarding private giving,” Thomas said, “unless [Correll] can add a zero, that’s not going to get us out of the woods.” Grants, he argued, won’t necessarily fund what the district is already doing. And, he continued, in terms of increasing enrollment, at some point, if you add students, you’re going to add costs. So, Thomas concluded, the board’s plan will have to combine making cuts with other efforts.

Nelson added that it’s important to think of the revenue enhancement strategies as interrelated. For example, he said, the district could ask the AAPSEF for two-year commitments to fund increased enrollment. Nelson urged the board to maintain an “investment mentality,” realizing that “some efforts will work and some won’t.”

Allen thanked the trustees for their feedback, and suggested that it was not likely that revenue enhancement strategies would be able to make up $5-7 million this year, but that perhaps they could make up some part of the deficit over a few years. He closed the meeting with, “We hear what you’re saying, and will be ready to come back with our ideas around these revenue initiatives.”

Next regular meeting: Jan. 26, 2011, 7 p.m., at the fourth-floor conference room of the downtown Ann Arbor District Library, 343 S. Fifth Ave. [confirm date]