Finance and Budget
Uncertainty about the financial health of the Little Rock School
District is a major source of uncertainty about the future of the district.|
The Little Rock School District (LRSD), with a 1995-96 total budget of approximately $141 million,1 over 2,600 employees, and a customer base of 25,000 students plus thousands of patrons in the community at large, is one of the largest businesses in Little Rock. Based on the number of total employees, full-time or part-time, Arkansas Business ranked the LRSD as the 10th largest employer in Arkansas in 1995.
The following financial analysis of the LRSD is intended to provide the community with a better understanding of the business aspect of the school district. The analysis begins by examining the district's revenues and expenses from a big-picture perspective. This will show how the district's financial pie is sliced.
The analysis then compares the LRSD with 17 other districts across the nation chosen to match the LRSD primarily in terms of size and type of community. Information on these comparable districts was provided by Educational Research Services (ERS). Additionally, ERS reports national statistics for districts with the same per pupil spending as the LRSD. Significant differences in these comparisons are highlighted. Based on these comparisons and highlighted differences, the analysis then focuses more specifically on school district staffing.
The chapter concludes with a question-and-answer section that provides summary comments on seven questions.
Most of the financial information that follows was obtained from the audited financial statements of the LRSD. The district has four major "funds" for accounting purposes: general, special revenue, debt service, and capital projects. Most of this broad analysis focuses on the general and debt service funds within these reports, as these are the funds over which management has the most discretion. These also represent over 90 percent of the revenues and expenditures of the district. The special revenue fund contains federal revenues and expenditures and state magnet school revenues and expenditures. The comparative analysis includes the expenditures in the special revenue fund, but excludes debt service. None of the analysis that follows considers expenditures for capital improvements.
The two major sources of funding for the district are local and state. Local sources consist of real estate taxes, personal property taxes on individuals, and property taxes on the assets of utilities and carriers. The major state source has been called "minimum foundation program aid" or MFPA. Beginning with the 1996-97 school year, this has been replaced by "state equalization funding." The school year ends in June each year, so 1989 refers to the school year beginning July 1, 1988 and ending June 30, 1989.
Figure 9-1 presents the major funding sources of the district from 1989 through 1996, showing the trends in each source. Overall, Figure 9-1 indicates that local funding sources provide nearly twice as much revenue to the district as do state sources. Additionally, temporary desegregation funds were a significant source of revenue to the district in the early 1990s. Figure 9-2 contrasts the temporary desegregation revenues with the regular state and local revenues combined.
Temporary: Desegregation Settlement Payments and Loan Fund
As part of the 1989 settlement, the State of Arkansas agreed to pay to the LRSD approximately $71 million between 1989 and 1997. In addition to these settlement payments, the State of Arkansas agreed to loan the district up to $20 million between 1989 and 1999. As of the end of the 1995 school year the district had received $12 million of loan proceeds. Such loan funds will be forgiven if at any time prior to December 31, 2000, the average achievement test scores of the district's African-American students are 90 percent or greater of the average scores of the white students--an unlikely development. The current district budget contains no provisions for repayment of this debt.
As Figure 9-1 indicates, moneys from the settlement payments and the settlement loan fund totaled $12,559,250 in the 1989-90 school year, increased to over $16 million in the 1990-91 school year, and then fell steadily to $4,329,942 in the 1995-96 school year. The final settlement payment of $683,125 occurs in the 1996-97 school year. This decline has been somewhat offset by increases in regular local and state income; nevertheless the absence of these state desegregation funds in the future will present a challenge to LRSD financial managers.
Figure 9-2 reveals the nature of the budgeting challenge. Expenditures rapidly expanded in the first few years of the desegregation settlement funding. Temporary desegregation funds, the shaded area at the top of Figure 9-2, have covered the difference between regular state and local funding and the total expenditures in every year since 1989. After the state's desegregation settlement payments end in 1996-97, either expenditures will have to drop or revenues will have to increase in order to balance the budget; or additional borrowing from the state loan fund will have to occur.
The budget adopted for 1996-97 includes, as noted, the final state desegregation settlement payment of $683,125. It also shows a draw-down of $3 million on the settlement loan fund, which apparently was necessary in order to project a balanced budget, as required by law. (It should be noted that in previous years the LRSD sometimes projected a draw-down on the settlement loan fund that, by year's end, had not been necessary.)
The importance of a fiscally sound district has been magnified by a new Arkansas law, Act 915 of 1995, which addresses school districts in "fiscal distress." A district is in fiscal distress if its current-year expenditures exceed its current-year revenues over a combined three-year period. There are three "phases" of fiscal distress, which vary according to the plans drafted and progress made by a district to correct the deficit problem. A district that is in fiscal distress and that either has no plans for correcting or is making insufficient progress in correcting the distress will be taken over by the Arkansas Department of Education. Thus, bankruptcy as a financial option for the district means turning over control of the district to the state.
Table 9-1 compares the percent of revenues of the LRSD derived from state and local funding sources with the same percentages for comparable districts and the national average for districts having the same revenue per student as the LRSD. The comparable districts are based on budgeted 1994-95 amounts, while the LRSD percentages are calculated based on budgeted 1995-96 amounts.
As the table indicates, the LRSD receives more local support and less state support, as a fraction of revenue dollars, than the comparable districts and national reporting districts. Of every revenue dollar, 56 cents is derived from local sources, primarily real estate and personal property taxes, while state revenues account for approximately 37 cents. Prior to 1996, however, teacher retirement and health benefits were paid directly by the state and thus not reflected on the district's budget. The inclusion of these revenues on the budgets of school districts across the state will have the effect of slightly increasing the proportion of revenues provided by the state to each district, including the LRSD.
Approximately 37 percent of the LRSD's revenues are derived from the State of Arkansas. The amount funded each year depends on a funding formula which attempts to equalize the per-pupil funding allocated to all the districts within the state. This formula was changed by the Arkansas legislature in 1995. Because of its complexity, the significance of the amounts involved, and its significant effect on the LRSD's budgeting process each year, the basics of this formula are described below.
The state "pool" of money for general public education consists of the state appropriation to the Department of Education for the public schools as determined by the state legislature, plus an amount equal to 25 mills (a "mill" is $.001, or $1 per $1,000) times the total statewide assessed property values. The state pool of money is divided by the number of students in attendance in the public schools statewide, called "average daily membership" or ADM, to arrive at the state rate per student.
Local districts are assumed to provide 25 mills times the local assessed property values in total local funding, regardless of the actual millage rate in the district. This amount, divided by local ADM, indicates the local rate per student. The difference between the state rate per student and the local rate per student represents the amount of state funding, per student, provided to the district. In the LRSD the local millage rate is 43.9, which means there is much more local funding per student than required or assumed (25 mills) by the state aid formula. Figure 9-3 depicts the calculation process step by step.
State Funding Formula
Statewide Assessed Property Values x 25 Mills
.98 (collection ratio)
Total State Funds Available
Statewide Average Daily Membership (ADM)
State Funding per Pupil
25 Mills (.025)
.98 (collection ratio)
Local Funding per Pupil
Local Funding per Pupil
State Aid per Pupil
State Equalization Funding $$
Now, what causes state funding to the LRSD to change from year to year and what makes the exact state amount difficult to predict for budgeting purposes? Consider the major inputs to the formula:
The state pool of money depends on the amount appropriated by the legislature and on statewide assessed property values. Once the total pool is known, the per district funding amount depends critically on the number of students statewide and in each local school district. An increase in students statewide (average daily membership--ADM) reduces the state rate per student, because total state dollars are being spread over more students. At the local level, the total dollars received from the state depends on the difference between the state rate and local rate per student times the local ADM. If the number of local students decreases, the total dollars received from the state decreases. While there are other details to the formula, this outlines the significant parts.
How does the LRSD fare relative to other districts in the state in terms of the state funding formula? A complete answer is beyond the scope of this report, but a cursory answer can be given. Total property values in the LRSD are nearly 10 percent of the state total assessed values. Students in the LRSD, however, represent only about 6 percent of the total students in the state. Thus, with respect to the portion of state public school funds derived from property taxes, the LRSD is a net contributor to the state pot.
(Note: An amendment to the Arkansas Constitution was proposed by the General Assembly in 1995 and approved in the November 1996 election for the purpose of removing the risk that a state court might find the new state funding formula inconsistent with the state constitution. However, the new state funding formula is being challenged in U.S. District Court, in part on the grounds that it in effect reneges on the state's commitments in the 1989 desegregation settlement agreement with the three public school districts in Pulaski County.)
What options does the LRSD have for raising its revenues? There are really only two. The first option is to increase the local millage rate and hence the amount of local revenues. This requires having voters approve a millage increase. A one mill increase would add approximately $1.7 million to the district. Whether such an increase could be sold to Little Rock voters is uncertain, but voters in the Pulaski County School District recently voted down a millage increase by a nearly four to one margin. The second option is to increase the number of students in the district and thereby increase the amount of state aid to the district. For example, if half of the 5,000 to 8,000 students who have left the district to attend private or parochial schools were to re-enter the district, state revenues to the district would increase $5 million to $8 million. Stated somewhat differently, bringing approximately 850 students back into the district is roughly equivalent to a one mill increase in local property taxes. (These figures must be seen as instructive but not precise. As noted above, if there is a net increase in the number of students statewide, then the state aid per student could be reduced, depending on whether other factors in the state funding formula do or do not change.)
Expenditures in the LRSD, like revenues, have grown at an average annual rate of over five percent since 1989. Declining enrollments mean that per pupil expenditures have increased at an average annual rate of over 6.3 percent during the same period, or roughly twice the rate of inflation. Tables 9-2 and 9-3 include the LRSD and 17 other school districts chosen to match the LRSD primarily in terms of size and type of community. Table 9-2 reports the type of community, size of district, and real per pupil expenditures. Table 9-3 reports socio-economic characteristics of the 18 districts.
Table 9-2 shows that, in real terms, the LRSD had the fourth highest per pupil expenditure amount on the list. Real per pupil expenditures divide the nominal amount by the cost-of-living index for each city.
The following analysis examines the general fund expenditure proportions and combined general fund and debt service expenditure proportions. These are the two operating funds over which management has the most discretion and which comprise over 90 percent of the budget. The general fund is examined alone and then combined with debt service because this allows for two different expense classifications, as shown in the figures. Restricted funds and capital funds are excluded from the analysis.
Figure 9-4 indicates how money in the general fund was expended in 1989 and 1995. As the figure indicates, instructional costs accounted for 75 cents of every dollar spent in 1989 and 73 cents in 1995. Administrative costs accounted for 13 cents in 1989 and 16 cents in 1995. Transportation accounted for 6 cents in 1989 and 7 cents in 1995. While a two-cent or three-cent change in the allocation of a single dollar of district funds may seem small, in a budget over $140 million this translates into approximately $3 million that has apparently been shifted from instructional activities to administrative activities.
Examination of the general and debt service funds combined allows for a slightly different classification of expenditures. As Figure 9-5 illustrates, salaries and benefits comprised 69 cents of every dollar spent in 1989 and 73 cents in 1995, respectively, with the remaining amount spread around on debt service, purchased services, supplies and materials, and other. This figure has important implications for any budget cutting measures. Since over 70 cents of every dollar spent is related to personnel, any significant budget adjustments will likely involve a reduction in personnel. One should note, however, that it is common for any service organization such as the LRSD to spend over 70 cents of every dollar on personnel costs.
The analysis above has examined the financial trends in the LRSD since 1989. Now, it will be useful to compare the LRSD with other school districts. Educational Research Service (ERS) is a national clearinghouse for school management and research information. Using budget and staffing information provided by local districts around the country, ERS compiles summaries and comparisons of financial and staffing measures. A sample of 17 "comparable" school districts was selected for comparison. The selection criteria were primarily size and type of community. (Table 9-2 contains the list of comparable districts. Table 9-3 contains socio-economic characteristics of the districts.) East and West Coast districts were excluded. ERS then provided both a "budget profile" and a "staffing profile" comparing the LRSD with the 17 other districts and with a national average. ERS reports two national averages: one that averages all reporting districts in the nation, and another that averages all reporting districts having approximately the same level of revenues per pupil as the LRSD. Because of the wide variance in revenues per pupil reported by districts throughout the country, this latter average should be more meaningful for comparison purposes. The budget and staffing profiles for the LRSD are based on the 1995-96 budget, while the ratios for the comparable sample are for 1994-95 budgets. Since proportions of the budget and not absolute dollar amounts are being compared, the use of different years does not significantly affect the analysis. The discussion below summarizes these comparisons and highlights differences.
List of Comparable Districts1
District or City2
1. Comparable districts were chosen to match the LRSD primarily in terms of size and type of community
2. Comparable districts are listed in order of `Real Per Pupil Expenditure' based on 1994-95 budget amounts. Real expenditures are actual (nominal) expenditures divided by the cost of living index.
3. The number reported for Little Rock for 1994-95 includes federal expenditures and magnet (special fund) expenditures. Excluding these expenditures causes real per pupil expenditures to fall to $5,352.
Table 9-4 shows the percentage of the total budget spent on different categories of expenditures. As a percent of the total budget, the LRSD appears to spend more on central administration and transportation than the comparable districts and the national average. These comparisons are somewhat crude, as different districts may classify expenditures differently. For example, someone involved with instruction but working in the central administration office may be classified as administrative by one district and instructional by another. Additionally, retirement and insurance benefits are not included in LRSD budgets prior to 1996, as these amounts were direct obligations of the state prior to that time. This was not the case for most of the comparable districts. The table does provide a starting point for asking further questions, however. For example, does the LRSD in fact spend proportionately more on administrative costs than the comparable districts, and if so, why? Or, do classification and accounting practices explain the differences?
Overall, Table 9-4 reveals that the LRSD generally allocates its budget dollars in a pattern that is very similar to the sample of comparable districts and to the districts in the national average.
Staffing Ratios Compared
While the previous comparisons were in terms of budget dollars, the following comparisons are in terms of personnel. Table 9-5 compares the LRSD with the 17 other districts of similar type and size and with all districts in the nation reporting per pupil revenues similar to the LRSD.
In contrast to the budget comparisons, which showed the LRSD spending proportionately more money on central administrative costs than the comparable districts, the staffing comparisons do not indicate overstaffing at the central administrative level. One possible explanation is that most of the central administrators in the district have been around long enough to reach the top of the pay scale. Outsourcing of any of the central administrative functions could also explain relatively more budget dollars but fewer personnel. Finally, differences in classification of personnel and accounting practices, as previously discussed, could be an explanation.
Figure 9-6 shows staffing of the LRSD in comparison with the comparable districts and national averages. Figure 9-6 indicates the actual number of personnel in the LRSD along with the number of personnel that would be in the district if it had the same staffing proportions as the comparable districts. The figure provides a visual image that is consistent with the table. It suggests that there may be overstaffing of building site personnel.
The LRSD must file an annual report with the North Central Association (NCA) for accreditation purposes. A report containing staffing information and enrollment information is filed for each school. Information on professional staffing is provided by position for each school. Special subject area teachers are counted based on full-time equivalents. A compilation was prepared which tabulates teachers and enrollment by school, and then calculates the number of "standard" teachers per school assuming a pupil-to-teacher ratio of 17, which is approximately the same as the comparable districts, and a ratio of 18, which is approximately the national average. Table 9-7 is based on the report filed with the NCA in 1995, and uses the LRSD's average annual teacher salary reported to the state in 1995-96.
As Table 9-7 indicates, the difference in staffing ratios potentially involves significant dollar amounts if viewed through the lens of cost efficiency. A second, alternative view is that the LRSD perhaps is staffed at about the right level if it were to re-enroll the thousands of students who have departed the district over many years. In the absence of a significant enrollment increase, however, the district may have to consider personnel reductions.
One other aspect of Table 9-3, the impact of which is unclear, is that the LRSD has the largest disparity between racial composition of the population at large and the racial composition of the school district. In Little Rock the population at large is roughly 65 percent white and 35 percent African-American, while in the LRSD the population is 65 percent African-American and 35 percent white. Richmond, Virginia, which has a population comprised of 43 percent white and 55 percent African-American and a school district containing 21 percent white and 77 percent African-American, is the next most disparate district.
Arkansas state law requires a minimum five-year review of property values by a county assessor. In Pulaski County the latest round of reassessments was concluded in 1996.
The preceding sections of this chapter as well as Chapters Three and Four serve as background for the broad conclusions offered here in a question-and-answer format.
Does the LRSD receive enough funding to run an exellent school system?
At the broadest level, the answer appears to be yes. The LRSD has the benefit of the broadest and deepest tax base of real and personal property in Arkansas, and that base is taxed at 43.9 mills, the highest rate among sizable districts in Arkansas (except for one district, Fayetteville, at 44). This answer, however, must be qualified by these two examples.
First, a family living in the city may make more money than their rural relatives, but it takes more money to live in the city. Housing, for example, is usually more costly in the city. So it is with school districts. In the city, costs are higher in general, and problems are bigger and require more resources.
Second, a family could make a better-than-average income but not be able to spend their dollars on all the things they need. For example, they may have such large, ongoing medical expenses each year that they may not have money left to spend on clothes or an automobile, let alone be able to afford to send the children to college. So it is with school districts. Despite an apparently healthy income, all important needs might not be met.
In reality, the LRSD operates in an environment filled with an extraordinary number of constraints, as discussed in Chapter Seven. Given this environment, it is not clear that operating income is or is not adequate to the task, and this issue needs to be considered in the context of the following question.
Should the LRSD propose a millage increase?
The people of Little Rock have an impressive record of taxing themselves to support the public schools, and there is no reason to believe they would not be willing to do so again. However, the following steps would seem to be conditions of a successful millage election.
(1) The administration and school board would need to demonstrate that the LRSD's financial house is in order. This means showing that the district is willing and able to live within existing income. Credibility may first require a period of living within the income the district already has before asking for more. There has to be confidence that the schools can deliver what they promise. An attitude that says, "Give us more money and we'll do better," probably would not be convincing.
(2) The schools need to promise that they will deliver what the people of Little Rock want from their schools. Voters want to know what they will receive for their money. This points to an obligation on the community to decide and communicate what it wants from its public schools--a process addressed in Chapter 14. If the community indicates it wants more from the schools than they can reasonably provide with current funding, then a millage should be proposed. In any event, our judgment is that any millage request should be approached very cautiously and only after a series of actions that build community confidence in the directions and programs of the schools.
How important is the desegregation settlement loan? When will it be repaid?
As noted earlier, in the 1989 settlement, the State of Arkansas agreed to make loan funds available to the LRSD in the amount of $20 million between 1989 and 1999. These funds, according to the agreement, would not have to be repaid if the LRSD succeeded in closing the gap in achievement scores to the point that African-American scores were 90 percent of white scores. The test scores reported periodically since 1989 show little, if any, closing of the test score gap.
Given the fact that the LRSD has already drawn $12 million from the loan funds, and that the LRSD projects the borrowing of an additional $3 million in 1996-97, the loan funds are obviously very important to the district.
In the next few years the loan funds may in effect be the strategic reserve that could be tapped to close the likely gap between expenses and income in the budget. Previously, in addition to the loan funds, the district had the extra money of the desegregation payments as well as significant fund balances to close any gap between expenses and income. After 1996-97, only the loan funds will remain as a buffer, which means they may be more important than ever to the LRSD's financial managers.
The 1989 settlement agreement described the money as a "loan," and the accomplishment which would result in its forgiveness was clearly stated; otherwise it was to be repaid in full, with interest. Repayment is to be made in annual installments over a 20-year period with three percent interest, beginning seven years after the funds were drawn down. This would appear to leave state officials in the driver's seat since the state could presumably deduct the amount of an annual repayment from the money the state gives the district each year. A disincentive to state insistence on repayment is that reducing the district's income in this way could possibly push the LRSD into the "financial distress" category defined in Act 915 of 1995. At its worst, the Arkansas Department of Education, under Act 915, could become responsible for running the LRSD under what would in effect be bankruptcy or receivership. Such direct involvement by a state agency would potentially make the state liable again for any constitutional failures of the district. (A primary incentive for the state's agreement to the settlement in 1989 was that it defined state liability.) There is considerable potential in the loan issue for disagreements and litigation.
The state agreed to the inclusion of terms that would result in state forgiveness of the loan, when the loan was negotiated. Today it is widely acknowledged that the terms--raising African-American achievement scores in the district to 90 percent of white achievement scores--were unrealistic. Given the state's readiness in 1989 to forgive the loan in response to improved achievement among minority students in the LRSD, perhaps district officials should ask the state to renegotiate the terms of forgiveness and replace the gap-closing measure with something that was aimed at a similar goal but with a realistic chance of success. The clock on the loan's forgiveness claim runs until December 31, 2000, which means that there would be 36 months, from July 1, 1997, in which to develop and pursue a different measure.
Once the settlement loan dollars run out, how will the budget be balanced absent a millage increase?
One of two choices, or a combination of them, would be necessary. (1) Revenue--specifically, local property tax income, attracting new students and/or the regular state subsidy--must grow enough to replace state loan dollars as needed to finance operations. (2) The growth in expenditures--the cost of operating the district each year--must be slowed to match available revenues. This is an approach based on optimistic assumptions about revenue growth, assumptions which are risky but not completely unreasonable. This strategy is vulnerable to recessions, which tend to slow the growth in state tax receipts, and is also vulnerable to declines in student enrollments, which result in a reduced state subsidy to a school district. This option has the advantage of being the least painful, and for that reason it is the option likely to be taken, either by choice or default. Its disadvantages are that it is risky and may not work; and if it does work, the district will have very little budgetary flexibility to spend dollars differently in the meantime. Stagnation can be a byproduct. This approach is reminiscent of budget-balancing at the national level in which one does not cut spending. Instead, one reduces the rate of increase in spending to allow growth in revenues to catch up to spending levels.
Is bankruptcy an option?
Yes, but in our opinion it should be an unthinkable option.
The district's financial position appears precarious but not impossible. That is, the district should be able to keep expenses within available income and pay vendors and personnel on time--although some downsizing might be necessary.
Bankruptcy, however defined, would be a horrible commentary on the community and its leaders. It would say that the community is not capable of managing its own affairs. It would be another embarrassing Little Rock story that would be told across the nation and around the world.
All things considered, is the LRSD on the financial edge?
It is difficult not to conclude that the district is at risk when one notes (1) the significant decline in year-end operating fund balances, (2) the end of state desegregation settlement payments, (3) a district budget for 1996-97 that projects the need for $3 million in loan money, (4) the absence of an announced financial strategy for moving the district through the next several fiscal years, and (5) the small but added budget burden of annual repayments to satisfy the terms of the $20 million state loan.
Not considered above is over $70 million in renovation costs, as estimated by 3D/International in a 1995 study of the district's facilities.
Nonetheless, the strategy for dealing with the situation--in short, how it will be managed--makes all the difference in the world. The LRSD could in time become financially rock-solid, or it could find itself unable to pay its vendors and employees. It depends on management. Today, the outcome is uncertain.
What more needs to be done?
There is widespread uncertainty about the LRSD's financial stability both short-term and long-term. In our view, here is what is most needed: an appropriate LRSD official must stand up and say, (1) "Here is the financial picture for the next few years," and (2) "Here is what we'll need to do to get through it."
A great amount of preparation would have to precede the first statement, and a great amount of hard work would have to follow the second statement.
It is especially important that this be done in order to reassure business and civic leaders who themselves manage and understand complex budgets. Their support is critical to any successful millage election in the future. For them, financial clarity is the starting point.
1. 1995-96 total budgeted expenses per LRSD documents.