Fourth District School Board Member Art Johnston was in rare form at the June 21 School Board meeting, proposing a budget amendment to block transferring $3.3 million out of the unrestricted general fund for debt service.
“The administration got us into this mess,” Johnston said while presenting the amendment. “The administration can find a way to get us out of it.”
The “mess” in question is a $3.6 million budget deficit—equivalent to more than 35 full-time teachers—at a time when the District is struggling with declining enrollment, large class sizes, teacher layoffs, and cuts to programming.
The general fund reserve balance is at less than two percent of the total budget. While the Board managed to save the optional “zero hour,” class sizes still average in the high 30s and there is little hope of bringing back the seven-period school day.
A 2003 School Board policy requires a two-thirds vote by the Board before allowing the general fund reserve balance to drop below 10 percent. At no time has such a vote taken place, and this is the first board in years that might not actually achieve a two-thirds majority. The question is: So what if they didn’t?
“I realize that, by state law, we as a school board are obligated to pass this budget in June,” said At-Large Member Harry Welty. “I just want everybody to know that I will not be voting for this budget. It’s my lame protest vote against everything that led up to what I still regard as a fiscal catastrophe.”
Newly-elected At-Large Member Alanna Oswald stuck her neck out with a heartfelt plea that could easily be used against her to suggest she doesn’t understand the budget. “We never, ever see the complete picture in front of us when we pass all these little pieces [of the budget]...I consider myself a relatively intelligent person, and yet I looked at the first page of this packet, and I am so confused.
“I don’t have a lot of time to process this, but if I would have been able to see this document at a committee meeting, I wouldn’t have to sit and ask these questions [now]...It’s hard, because all of these cuts we’re making are people. They’re people’s passions, people’s programs, kids’ educations at stake. I don’t know what to do when I can’t even understand my own document and I’m trying.”
Oswald questioned why a policy passed in 2003 has never been reviewed and suggested she might vote against the budget so as not to condone policy violations. “My sense is to stick with the rules, and that’s where I feel like I need to understand things more. So if anybody can add to this discussion and tell me why I should not follow these rules...please, convince me. I want to have a reason to look at these people and tell them why they can’t have seven hours a day, or tell any of these teachers that we laid off that, ‘We could have had you and more.’ I want to feel confident in that and I need help.”
That’s when Johnston dropped his budget bomb. “I think it’s time that we as a community, we as a School Board, start holding the people who made this plan accountable. Of course we will pay our debts. It’s not a question of whether or not we’re going to pay our debts, but a question of whether we’re going to pay it from the general fund...Remember, up until two years ago, it was vehemently denied we were even doing this.”
Up until 2014, when a state audit triggered by a taxpayer petition revealed otherwise, the administration repeatedly denied that general fund money was being used to pay for the Red Plan. The administration blamed budget shortfalls on delays in state aid and unfunded mandates. Since the audit, administration has openly acknowledged that $34 million has come out of the general fund to pay for the Red Plan.
“I put this resolution up to force the administration, who got us into this situation, to deal with it...It’s time we stopped this transfer and the only way to do that is to stop the transfer.”
Oswald inquired as to the source of the $3.3 million and Business Services Director Bill Hanson replied, “The source for these funds are operating savings that we no longer incur from operating fewer schools. So, for example...the heating bill at Woodland Middle School. We no longer pay a heating bill at Woodland Middle School. We no longer pay a principal’s salary for being there. We run one less high school, having moved from three high schools to two. There’s a whole list of items that actually add up to much more than $3.4 million. We specifically earmarked those savings for paying these debt obligations that are paid from the general fund.”
Welty tossed a snarky question to Hanson: “Do you consider an increase in students in the classrooms—that were once 31, 32 and now are 36, 37, 40—do you consider that savings?”
“There was no assumption about any of that relative to the savings that were calculated as part of the Long Range Facilities Plan,” Hanson replied.
But Welty had a point to make and he came back around to it. “In other words, we calculated that we would be saving $5 million a year, and whether we actually found savings through more efficient heating and cooling, or a smaller need for teachers because of the consolidation of the schools, we have to find that $5 million even if there is no savings?”
Both of them are right. As a line item in the budget, the $3.3 million in savings is no less real just because it’s intangible. On the other hand, the savings are not only quite a bit lower than projected, but the District repeatedly misinformed the public about the savings until the 2014 audit.
In the original Review and Comment, the savings should have begun at $5.3 million a year, resulting in over $50 million today. Until 2014, the District claimed savings were “right on target”—$4.4 million in 2012 and $5.3 million in 2013. The audit revealed savings were actually far below target—$2.3 million in 2012 and $3.5 million in 2013. Today, savings total less than half of what they were supposed to be.
But Johnston wasn’t buying it. “Even if there was savings—let’s assume there was savings; I don’t think there was, but let’s assume there was—we as a Board should be putting any of those savings back into the classrooms, not using it to pay debts and taking it away from the classroom...For people who are concerned about the legality of such a thing, the administration...they’re the experts, I hear.”
Johnston posited that withholding the transfer would force administration to refinance or negotiate for relief from the Minnesota Department of Education (MDE). “I’m not advocating that we default on our debts. I’m advocating that we get some credible advice on how to take this debt out of the general fund...We have to find some way to stop this drain out of the general fund and we have to do it now.
“MDE was part of this. We should be advocating a subsidy for our debt payments from the legislature...We certainly have influential legislators that can go through and say, ‘Hey, MDE, you approved this. You approved taking this $70 million out of the general fund. Well, hey, Duluth can’t do it.’”
Unsurprisingly, MDE does not view Duluth’s debts as their responsibility. “It’s a local issue,” says MDE Finance Director Tom Melcher. “We [issued an opinion] about whether it was economically viable based on information the District gave us at the time. We looked at the statute as it existed back then and also the history of what that levy had been used for. The Department looked at that and felt the plan was consistent with it. The law was changed after the Red Plan was approved, in part because of the way it was written and the way it was used in Duluth.”
According to Melcher, there is no state law that specifically prohibits the Board from blocking a transfer out of the general fund. “The issue there would be, once you’ve got debt, you’re obligated to pay it and you’ve got to have a source to pay it.”
There is also no state law that would prevent refinancing. “It all depends on the conditions under which they borrowed the money. Quite often, there are conditions that only allow refinancing after a certain period of time.”
MDE has no funds to assist overextended school districts, and while the legislature has been known to pass special legislation, it’s rare. “Your options are to raise revenue, reduce expenses, or both.”
Ultimately, the budget passed 4-3 with Johnston, Welty, and Oswald opposed. Johnston’s amendment failed 6-1, but Welty and Oswald vowed that if next year’s budget requires transferring money out of the general fund, they will vote to block it.
“I’m tired of the administration’s mealy-mouthed crap,” Welty later told the Zenith. “but I voted against the budget knowing that four would vote for it...It was a symbolic thing. It had to pass. If it didn’t, it would be like Brexit”—the United Kingdom’s June 23 referendum to leave the European Union. The morning after, many Brits said they merely wanted to send a message and they would have voted to stay had they known it was going to pass.
“We’re up shit creek without a paddle, and it’s sad that all I can do is vote symbolically...We can’t keep robbing the general fund until [the Red Plan] is paid off in 12 or 14 years. We can’t levy more taxes. We levy almost to the max already.
“Near as I can tell, the only way we can get more money is to ask for voluntary votes to increase our operating budget, but that’s going to be a hard sell after we turned down $14 million,” when the Board rejected an offer to sell the shuttered Central High School property to Edison Charter Schools. “I’m afraid all I’ve got for you are a bunch of sighs.”
Oswald says her statement about not understanding the budget was partly hyperbole to make a point and partly true. “We don’t get all these pieces [of the budget] all at once and the other Board members don’t care. Or, rather, I shouldn’t say they don’t care, but they trust in our fearless leaders. We have to come together as a Board and address this budget, but all I get are blank stares.
“I voted against [the amendment] because we have to pay our bills, and we don’t have any other method to do that right now. I totally support his idea and I want to end this payment before we pay it next year...By next year, yes, [she will vote to block transferring money out of the general fund]. I would vote to block next year’s transfer right now if I could.”
Oswald wants to approach the legislature and MDE for help, as well as get the Board read-only access to the District’s accounting software, so they can evaluate the effects of budgetary decisions throughout the year. “But we are also fully cognizant that, even if we came back with a solution, it won’t be accepted because it came from Art. Just because Art wants something will mean four people don’t.”
From Johnston’s perspective, District residents were told the Red Plan would be paid for entirely by savings, property sales, and a tax increase of no more than $8-11 per month. Instead, taxes have been much higher, unused property has sold for less than market value or not sold at all, and savings have not fully materialized, requiring the debt to be paid for by cuts to the classroom. Therefore, he wants the Board to withhold the transfer to force the administration to deal with the fallout of its broken promises.
“These people are in charge. These are the ones with the big bucks. [Superintendent Bill] Gronseth makes $160,000 a year. He has access to financial and legal experts. I think we should force him to deal with our debt without hammering the classroom. You came up with this, so you find a way to deal with it.
“We’ve already pulled $35 million out of the general fund and we’re going to have to pull another $40 million out before this is done. Why are we taking advice from the same people who got us into this mess? They’re not going to admit they screwed up.
“I was quite sure the amendment wasn’t going to pass. It would be the nuclear option...But next year, I think Alanna will vote with me and I think Harry will, too. We have to do something to stop pulling money out of the general fund to pay for debts. I don’t know how it will turn out, but that doesn’t mean we should do nothing.”