More Unreported Benefits to the School System

The following is the second letter to the Finance Committee on this subject (see first letter at Menu item titled ‘Letter to Finance Committee re: Under-reporting of Shrewsbury’s Per-Pupil Expenditures’). This letter identifies a potential $6 Million worth of benefits to the Shrewsbury School System which are not counted in school spending and per-pupil expenditures reports. Town officials refuse to address and resolve these issues of under-reporting and non-reporting. Doing so now would practically make it impossible for school officials to continue to complain that they are underfunded.

May 8, 2015 

TO: Shrewsbury Finance Committee 

Cc: Town Manager Dan Morgado 

FROM: John Lukach 

SUBJECT: Under-reporting of Shrewsbury’s Spending on Schools 

Reference: My March 6, 2015 letter (with two exhibits) to the Finance Committee on this subject, and related comments made at the March 7, 2015 Finance Committee hearing.

At its March 7, 2015 hearing, I presented a letter to the Shrewsbury Finance Committee and summarized its contents, which documented several areas of under-reporting of Shrewsbury’s per-pupil expenditures (PPE). It concluded by asking the Finance Committee to obtain from town officials a detailed analysis of spending on schools from municipal departments and SELCO, in order to correct this problem. Apart from the comments made at the March 7 hearing by committee members and town officials, which failed to rebut the major points in my letter, I have received no other feedback, either confirming or challenging the points in my letter. My purpose now is to reiterate the points in my earlier letter, address the comments made by committee members and town officials at the hearing, and provide additional examples of how Shrewsbury’s support of its school system is not correctly reflected in various reports, including the school department’s End-of-Year- Reports (EOYR), from which per-pupil expenditures are directly calculated.

I) Responses to Comments Made by Officials at the March 7, 2015 Hearing

A) I pointed out that since reported municipal department’s spending on behalf of the school department had been over $14 Million in FY2014, even a small 5% error would translate into $700,000 in under-reporting. But several officials incorrectly interpreted this to mean that I thought the actual error rate was only 5%. They then said that a $700,000 error, or even a $1.4 Million error (10%) was not significant. But these officials were missing the point. My exhibit allocating police costs showed an error of over 30%. A 30% error on $14 Million would be $4.2 Million, equal to the amount the school system received from the 2014 override. Was the override increase for the schools then also insignificant?

I am not saying that the error rate is 30% across all department reports, but I have provided enough evidence to show that it is probably greater than 10%, and possibly much higher. Therefore the town should perform an analysis to determine how great the error is.

B) The School Committee and the school department think that per-pupil expenditures is an important statistic, as demonstrated by the emphasis they give it every year in almost all of their budget presentations. If it is important, it should be more accurate.

C) Chairman McGee continued to insist that the school department’s spending reports were accurate, despite the fact that a year ago the Town Manager had conceded that there was some under-reporting of school spending by municipal departments. The school department’s spending reports cannot be accurate when they include spending data from municipal departments that are known to be estimates.

D) The Town Manager has acknowledged that reports of spending by municipal departments on behalf of the schools are estimates. Therefore he cannot know whether the errors in these estimates are 5%, 10%, 30%, or more, and thus he cannot know whether the actual error is significant. This alone is all the justification needed to perform a thorough study of this problem.

E) The Town Manager greatly exaggerates the effort needed to more accurately report spending on behalf of the school system. He uses the example of having people in one department having to keep track of every phone call or discussion with other departments in order to charge back the work. This would indeed be ridiculous if anyone suggested it, but no one has.   In the first place, only the time and resources that other departments spent supporting the school system would need to be tracked since improved school spending reports are the only objective. Tracking between municipal departments is not needed. Second, if the man hours spent by municipal departments on school matters were accurately tracked, other departmental costs could be allocated based on these man hours in order to obtain reasonably accurate spending reports. This would not require a major effort, as my illustration for police department spending showed.

F) The Town Manager indicated that a town’s per-pupil expenditures are not an important measurement, so it does not need to be accurate. So why doesn’t he tell school officials, and the public, during their meetings that this number is not important? He also said that the state only looks at the tax levy in determining whether its school system is being adequately funded by the town. But this statement is misleading.

1) A town’s tax levy is not the sole source of town revenues that are available to support the school system, for example – a number of revenue sources shown on Schedule A (local) receipts are also available. And Shrewsbury has some special areas that benefit its schools which are not available in most other towns. The state actually looks at all town revenues and what percentage of those revenues are used to support the school system.

2) The calculation of a town’s per-pupil expenditures are derived from the total amount of money and services received from all sources. This total should include the value of all municipal (including SELCO) departments’ services provided to the schools as well as the school budget. Any increases in municipal department spending in support of the schools increases the per-pupil expenditures calculation proportionately. Thus per-pupil expenditures are often used as a key indicator of a town’s support for its school system.

G) The Town Manager said that his departments (except for the police department) did use a consistent methodology for reporting costs to the school department. I have brought up this issue at meetings for a number of years, but this is the first time that the Town Manager has ever revealed at these meetings that he had such a methodology. If he has a documented methodology:

  1. Why hasn’t he ever said so publicly before?
  2. Has he provided the Finance Committee with a copy of this methodology?
  3. Would the Committee ask him to make his methodology and the resulting spending reports part of his annual budget package?

H) OPEB (Other Post Employment Benefits)

Both employees’ future pensions and their retiree health benefits are legal liabilities of the town. The only difference between them is that the state has mandated a year by which the pension liability must be fully funded. As long as the town’s annual pension funding is sufficient to meet the state’s requirement, there is no reason why the town cannot allocate a significant portion of its current pension funding to start funding retiree health benefits. And in fact it would be better accounting.

Why is this important? Because the school department’s share of total retiree health benefits is dramatically higher than it is for pensions (See Exhibit 2 from my March 6 memo). So it would be more equitable to allocate more of the funds now being used to address these unfunded liabilities to the school department, as much as $1.7 Million more.

The Town Manager claimed that no other towns provide any funding for OPEB. Where is his evidence to support this claim? And even if true, it still would not be the best accounting.

It was also stated that it is the policy of the selectmen to fully fund pensions by 2022, but 1) the state does not require this target date, 2) the selectmen can change their own policy whenever they wish, and 3) the Finance Committee is not required to accept the selectmen’s policy.

II) Additional Considerations Regarding Spending and Services for Schools

A) Organizational Differences that Affect School Spending Comparisons

Some school departments (e.g. Westborough, Worcester) have their own building and grounds maintenance departments. This means that, unlike Shrewsbury, the entire cost of these departments is included in school spending reports, including all current and future pension and retiree health care costs of their employees. This is a major reason why Shrewsbury appears to be spending much less on its schools in these areas.

            So, since the major portion of Shrewsbury’s spending on building and grounds maintenance departments benefits the schools, Shrewsbury could move these departments under the school department in order to make more meaningful comparisons to other towns. This would move all of the costs of these departments into school spending except for the portions that directly benefit the rest of the town. The pension and health insurance costs of employees in these departments would then also be included in school spending reports.

B) Revenue and Service Sources Not Available in Other Towns

Many years ago Shrewsbury invested in SELCO electric and then cable operations, and now realizes not only annual payments to the town but other substantial benefits. It also arranged for ash disposal operations that currently generate annual revenues of over $1.5 Million. None of these are counted in property taxes, but they are also town revenues that help support the school system. There are very few other towns that have a SELCO or an ash disposal facility.

My March 6 memo pointed out that SELCO charges the town $600,000 for general support, but not the school department. Since most of the town’s public buildings are schools, most of this $600,000 should be charged to the school system and recorded in its spending reports.

            But SELCO provides even more benefits to the town and the school department that are not charged. In the Shrewsbury 2014 Annual Town Report (pp 135 – 136), SELCO placed the total value of all benefits that the town receives from its electric and cable operations at $2.7 Million. Two of the benefits are a $237,000 payment in lieu of taxes from Electric operations, and a $794,000 franchise payment from Cable operations. These go into the General Fund. But other benefits provided to the town are not recognized elsewhere. They include:

1) A $721,000 savings from reduced electric rates for all Town buildings. But since the schools represent at least 75% of all town buildings (whether based on the number of buildings, their square footage, or the number of personnel), at least 75% of the $721,000, or about $540,000, is a direct benefit to Shrewsbury’s school system that almost no other town in Massachusetts enjoys. This benefit is not reported in school spending reports, and perhaps state regulations would not allow it to be reported there. If so, the town should at least identify this as yet another area that should be factored in when comparing Shrewsbury’s per-pupil expenditures with other towns.

2) A $465,000 savings for Shrewsbury Media Connection. Since one of the three local stations is for the benefit of the school department, one-third of $465,000, or $155,000, is the value that could be reported on school spending reports.

C)  Reduced Rates for School Water and Sewer

The town has always given the schools substantially reduced rates for its water and sewer consumption compared to the rates charged to residential and commercial users. These reduced rates lower the school systems’ reported spending on water and sewer by tens of thousands of dollars.

III) Fact Summary

Fact: Reports of Spending by Municipal Departments in Support of the Schools are estimates, and therefore not reliable.

Fact: Per-pupil expenditures are important measurements because school officials have made them so, and because their calculation is based on the same spending considerations that the state uses when evaluating the adequacy of a town’s support for its school system.

Fact: The Town Manager has never made available to the public a documented methodology for how his departments allocate costs to the school department.

Fact: Shrewsbury provides the school system with substantial benefits that are not reported in school spending reports.

IV) Major Potential Financial Impacts

$2.8 Million     Town officials conceded under-reporting of 10% of $14 Million; my police department illustration shows under-reporting of over 30%. Split the difference and 20% equals $2.8 Million.

$450,000         Equals 75% of the $600,000 charge from SELCO to the town.

$1.7 Million     The additional allocation to the schools that would result if the $5.9 Million that the town now allocates completely to the pension liability were allocated proportionately to departments based on both their pension and retiree health cost liabilities.

$250,000?       The amount that reported spending could increase if some municipal departments were moved under the school department.

$700,000         Other SELCO benefits (reduced rates and SMC) to the school department.

$5.9 Million     Total potential from these areas

In total, these amounts are more than just significant – they are substantial. It should now be clear that thorough analyses of these areas are needed in order 1) to ensure that all spending and services on behalf of the school department are accurately reported, and 2) to identify those factors (e.g. SELCO benefits, organizational differences) that can make comparisons of per-pupil expenditures problematic, if not meaningless.

I request a formal written reply from the Finance Committee that addresses each of the major areas I have identified, as well as indicating whether it intends to advocate for the analyses that I have identified to be necessary. Thank you.

Sincerely,

John Lukach