Unfunded Liability

Those of you familiar with Accounting know of FASB - the Financial Accounting Standards Board, the non-profit professional association that writes the rules, the Generally Accepted Accounting Principles (GAAP) used by the private sector.  Their intent is to provide transparency and credibility.  As an example, say your company needs a car, and must decide between buying and leasing.  Leasing can be deceptive if booked merely as a monthly expense, so GAAP requires that the total commitment be listed as a liability on the balance sheet.

Those of you familiar with public sector Accounting know of GASB - the Governmental Accounting Standards Board, which creates the equivalent "GAAP" rules for state and local governments.  They have slowly been upgrading the old cash flow methodology to increasingly adopt the "accrual" methods used in the private sector.  This is a good thing, forcing governments to acknowledge, even set aside funds for future benefits payments, for example.  But there is more to do.

Let's look at District 281, which, while it has aggressively addressed its over-capacity due to falling enrollment, still has two elementary schools to remodel or replace.  Remodeling both would run about $ 40 million.  Rebuilding both would run about $50 million.  As it happens, the Northport site is large enough to build a mega-elementary to subsume the smaller Lakeview population, which might save about $ 3 million to build and be less expensive to staff and operate.

This has stirred much comment and controversy the past three years, as I and others have reported.  These are big numbers for a district of less than 12,000 students to contemplate.  Tax increases one way (local bond) or another (state money, federal slush funding) seem certain.  We could have avoided that some said by closing these two, remodeling Pilgrim Lane instead.  But Pilgrim Lane was built in 1966, just two years after Lakeview in 1964.  Northport was built in 1956 and expanded in 1984.  No matter what, even though cheaper despite the logistics problems like busing, we still would have had a problem, the unfunded liability of District 281's buildings.

As it sits now, while we can play around the edges, how much to remodel and when, how large to rebuild and where, the District is on the hook for at least $40 million in capital spending.  Inaction or shuffling the facilities deck does not materially change this issue.

Look at the secondary facilities, Robbinsdale Middle School, Cooper High School, Plymouth Middle School, and Armstrong High School, built in 1956, 1964, 1968, and 1970, respectively.  Even the newest building will turn 40 next year.  (Sandburg Middle School, closed and re-purposed, was built in 1959.)

Meanwhile, the open elementary buildings range from 1954 (Noble) to 1969 (Zachary Lane), plus Forest in 2005.  Again, all but one is 40 years old or more.  Ironically, Olson, built in 1971, was closed in 1980, though later used for temporary roles like for remodeling other buildings.

Three points.  One, the Northport and Lakeview remodel situation is already on the balance sheet even if GASB doesn't formally require it.  Two, the remaining old schools are there, too.  Granted, schools like the 55 year old Noble Elementary have been significantly remodeled recently, but the fact remains that it is still 55 years old.  Even if it should last another 25 years or more, it will take more maintenance, remodeling, and ultimately replacement dollars in the future.  How much more?  That's point three.  Where's the plan?

The Wold consulting project that developed the plan we used to "right size" the district was necessary because we had no plan, not even enough data for a plan.  If I may, my City's capital plans go out to at least 2020, some portions further out.  We have scheduled the improvements and replacements needed in our buildings, streets, water, sewer, fire trucks, sewer lift stations and so on for that period, beyond which it is difficult to project financially.  We need something like that for District 281, and probably most other districts in Minnesota.

In 281's case, a Divestiture committee has been created to help dispose of now surplus property.  I hear that they are running into the same difficulty.  Without a plan for the current assets, where remodeling and/or replacement might make a good last use of some properties like Olson before disposal.  This seems like an excellent first project for the new Business Manager position being created on or before July 1, 2010. 

Personally, I would merge the Divestiture Plan Advisory Commission with the Financial Advisory Commission to create the "Facilities and Operations" committee which the Strategic Plan originally recommended.  They could begin assembling the needed information, much drawn from the Wold study, and come up with a baseline plan for the Business Manager to refine and, of course, incorporate into the budget process.

The numbers are too large and the buildings too old to continue with the current reactive, 1-2 year budgeting based on the assumption of endless money.

Comments

[Hiram]

There is a big difference between leasing and owning property. If Generally Accepted Accounting Principles say that they are the same, I would suggest that Generally Accepted Accounting Principles have a problem.

Just as a general observation, I think we should make the decisions we have to make concerning facility issues based educational objectives in combination with relevant financial considerations, on not on the basis of where a bunch of accountants arbitrarily choose to locate the results of such a decision on a balance sheet.

[J. Ewing]

Gee, I thought you were going to talk about the uses of accrual accounting for Social Security and Medicare. If the students of District 281 get out of a high school and somehow find a job, they will find that their new status as taxpayers places them in $1/2 million of debt on day one, from these two programs alone. Accounting can make the problem clear, but it cannot solve it.

[CDO]

There is, in fact,, a big difference between owning and owning property. My Father-in-law was a principle architect with Minneapolis City Schools for many years before he retired. His primary function was to adapt leased space to then, current district needs to best serve the needs of the students and the district. My point is that perhaps we should be considering a pardigm shift in school district planning that stops depending on owning and maintaining bricks and mortar structures to provide the best educational experience for students.

There has been a lot of dialog about "virtual learning" in the 21st century perhaps now, when we have 50 year old buildings in need of major remodeling or rebuilding, it is time to consider getting school districts out of the building and maintenance of facilities and to focus their increasingly limited funds on the education of students that is their primary function.

[Speed Gibson]

I went the long way around the barn to say that the district is already in the tall grass regardless Nothport and Lakeview, i.e., at least $40 million will need to be spent in the next 10 years or less. The plan will address the problem long term for the rest of the aging buildings. The "committee" might decide that newer (1964+) buildings are good for 100 years. Fine. That's at least a plan.

[The Big Stink]

We could make all of these arguments moot if we were to adopt a plan which included vouchers and tax credits. Let the market build the new schools. End of problem.

Now, let's sell that to Education Minnesota and the ed lobby!

[Hiram]

Never in history, has a market built a school.

[J. Ewing]

Nonsense. How do you think all of these charter schools acquired the properties that some are complaining about? How do you think all existing private schools found a place for their endeavors? "The market" is a huge thing, encompassing essentially all VOLUNTARY economic activity. You could even argue that when voters approve a bond referendum for a new school it is the market which builds it.

Perhaps more to the point, the school board should be planning the sensible "depreciation and maintenance" of its physical plant. It is what a good business does, along with producing a quality product at a low cost, with low administrative overhead. Which probably explains why they haven't.

[big hands]

The first research since the mid-1990s comparing the academic progress of students in Milwaukee's precedent-setting private school voucher program with students in Milwaukee Public Schools shows no major differences in success between the two groups.

And we want a voucher system, why?

[Hiram]

"How do you think all of these charter schools acquired the properties that some are complaining about?"

They bought them from the Chicago Board of Trade? The New York Stock Exchange leased them in exchange for a branch office?

Markets are simply places where things are bought and sold. Is there a place where you can go to buy Blake school? Is it on the market?

I do see your problem. If you define "market" as everything, then markets are responsible for everything, both good or bad. But markets more reasonably understood don't include everything.

[J. Ewing]

You twist my definition: Market= all voluntary economic transactions. I believe the subject here is why a public school system has failed to properly plan for the maintenance and replacement of its physical plant. The obvious answer is because they have no market incentive to do so. The school district gets paid by the state, or by property taxes, to build whatever they like almost regardless of the need, or the value to their customers. Likewise, they have no incentive to maintain those facilities properly or to plan for them as useful properties over the longer term.

[Hiram]

Nevertheless, the facilities are maintained, the grass gets cut. How do you explain that?

We do lots of things that aren't attached to a market incentive.

[J. Ewing]

Sure we do, but is the grass cut on a schedule that minimizes the labor cost, watering schedule, reseeding or any of a dozen other costs associated with this grass? Many public employees try to do a good job as a matter of personal pride, good for them. But that doesn't mean that there is any incentive provided by the system in which they work to do the job well. They get paid the same whether the grass is mowed or not, within reason, and whether the grass grows or dies. (I've actually seen school district employees mowing a field of dust.) In other words, their failure to perform their jobs well, in a cost-efficient manner, has no impact on their employment and, under such conditions, can be expected to perform less well than those whose jobs ARE impacted by competition. You want to argue absolutes, I want to argue relatively.

Does the grass get cut? Yes. Does it get cut properly, at the right time, in the right way, and for the least total cost? It is unlikely, because there are no "accountability measures" by which to know. On the larger issue, is the fact that we now are $40 million "out of whack" in our facilities just a minor oversight, like cutting the grass too short once?

[The Big Stink]

You have to understand Hiram's point of view: The private sector is simply a collection of individuals who funnel money on the way to its rightful owners - government. Any private enterprise is, thus, funded with public money. That it had its creation in the private sector doesn't matter to Hiram because ultimately, the money belongs to the collective. Therefore, any contract which involves more than one person is a province of the government.

Don't you get it?

[Hiram]

"Any private enterprise is, thus, funded with public money."

Private schools typically are. And the more public money they take, the more strings they will find attached to it.

[The Big Stink]

Any more strings than are already attached to the public school cartel?

[Hiram]

Any more strings than are already attached to the public school cartel?

Probably, but at the very least, all of those.