recommendationfile...“alaska’s health-care bill: $7.5 billion and climbing” (august 2011) that...

FY2013-2014 Pro Forma Financial Planning Guidance

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ANCHORAGE SCHOOL DISTRICT

ANCHORAGE, ALASKA

ASD MEMORANDUM #90 (2012-2013) November 5, 2012

TO: SCHOOL BOARD

FROM: THE OFFICE OF THE SUPERINTENDENT

SUBJECT: FY2013-2014 PRO FORMA FINANCIAL PLANNING GUIDANCE

ASD Core Value: The District will be open, transparent and accountable to the public.

RECOMMENDATION:

It is recommended that the School Board approve and authorize the Superintendent to prepare

the Anchorage School District’s Preliminary Financial Plan in accordance with the following

FY2013-2014 Financial Planning Guidance:

Submit an [FY 2013-2014 / FY 2013-2014+FY 2014-2015 two year] balanced budget for

Board Review in January 2013 with an upper spending limit not to exceed $831 million

that:

a. [Maintains / Reduces / Increases] direct classroom instruction staffing levels by

XX percent (_____FTE)

b. Provides for minimum direct classroom instruction staffing levels in accordance

with schedule __ [Appendix __]

c. [Maintains / Reduces / Increases] support function staffing levels by YY percent

(_____ FTE)

d. Strategically deploy up to $ZZ million in fund balance to close the gap between

revenues and expenditures [in FY 2013-2014 / across FY 2013-2014 & FY 2014-

2015 to enable a strategic transition to the long range targeted staffing levels for

FY 2018-2019]

e. Rebalances the distribution of General Fund resources to ensure, to the extent

possible, that the loss of Federal funding associated with the Federal

Sequestration process will have minimal impact on strategic initiatives and

programs necessary to support Destination 2020


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Table of ContentsExecutive Summary........................................................................................................... page 2

Background: Long Term Financial History & Outlook .............................................. page 4

Long Run Revenue & Expenditure Scenarios.............................................................. page 11

Strategies to Close the Gap in FY 2013-2014 ................................................................ page 23

Appendices ....................................................................................................................... page 28

Executive SummaryThere are four basic strategic considerations to consider in pro forma planning:

Revenue Outlook

Expense Drivers

Staffing Levels

Nature and extent of deployment of financial reserves

Revenue Outlook

Revenue projections for the next fiscal year and the out years appear flat at best with significant

shortfalls at worst. Federal Sequestration is anticipated to affect all revenue sources, reducing

total revenue anywhere from X percent to XX percent over the next five years.

Expense Drivers

The Districts spends almost 90 percent of the budget on personnel costs. Of this, salaries have

remained consistent. Benefits, specifically health insurance and pensions, have significantly

increased the total cost of each full time equivalent (FTE) position in the District over time.

Health insurance has increased at almost three times the rate of inflation historically, and if

costs continue along the same trend, costs will increase another 55 percent in just the next five

years.

Pension costs are increasing dramatically in order to fund the $11 billion unfunded state

retirement system liability. This pension funding is overtaking education operational spending

in the state budget now, and the funding necessary will double before the state liability is fully

addressed.

Staffing Level

Further, staff levels have increased over time as enrollment has remained relatively flat,

increasing total FTE count across the District. For budget development guidance the following

memo separates staffing into two categories for consideration:

Direct classroom instruction


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All other support functions

The District presents staffing levels in these two categories and the effects of holding current

staffing levels, increasing and decreasing those levels over time in order to achieve success as

defined by Destination 2020: ASD’s Strategic Plan.

Deployment of Financial Reserves

Financial reserves are a critical component to consider within budget development. Using

financial reserves for structural problems only serves as a temporary solution; however, use of

reserves to support the District through one-time transitions or through a temporary period of

financial instability may be a strategic use of a finite resource.

Key Scenarios to Consider

The following chart provides five scenarios represented by some of the options detailed

throughout the memo. All scenarios currently include flat revenue from the local and state

governments and current law implementing Federal Sequestration.

Existing cost driver trends will create run away deficits over time without additional revenue

sources or a change in resource deployment. Strategies to reduce staffing through attrition at

various levels and health insurance management over the next five years and can reduce the

structural deficit, but do not balance the budget. Additional revenue, or cost driver efficiencies

will be required to dissolve the deficit in whole.


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Long Term Financial History & Outlook

Historic Review of Financial Support

Revenue per student from the State experienced a slow decline across the 1990s up until 2004

(measured in real GDP inflation adjusted dollars). The real decline in State funding was

moderated by steady increases in local funding and slight increases in Federal funding.

Beginning in FY 2003-2004, the combination of a rapid increase in oil prices and changes in tax

policy contributed to large real increases in State oil revenue which were shared in part with

school districts across the state – resulting in an increase in State support from $6,281 per

student in FY 2003-2004 to $10,049 in FY 2012 [GDP inflation adjusted dollars].

Local support moderated while State and Federal support increased from 2010-2012. Most

recently, in the spring of 2012, Senate Bill 182 shifted an additional $8 million from local to State

support in FY 2012-2013.

The recent increase in Federal support will decline beginning this current fiscal year due to the

expiration of the ARRA and Federal Education Jobs Bill programs.


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Historic Review of Primary Cost Growth DriversSalary and benefits have represented 85 to 88 percent of the total General Fund budget for the

past 25 years – fluctuating between 87-89 percent over the past five years.

While the overall proportion of the budget spent on salary and benefits has remained relatively

steady, there has been a substantial shift in compensation from salary to benefits.

After adjusting for inflation, the overall aggregate salary per FTE has remained relatively flat at

roughly $60,000 over the past 20 years, while benefits have increased from $15,360 to $40,420

per FTE.

The two primary drivers of the rapid increase in benefit costs are health care and pensions.

Health Care Cost Drivers

The cost to the District of group medical insurance for the majority of its employees has

increased from $10,680 to $16,620 per year per person over the past five years – a compound

annual growth rate of 9.2 percent. Anchorage CPI-U over the same time period has been 2.3

percent.1 Thus, the per person cost to the District of group medical insurance has increased at

1 ASD Group Medical Benefit Cost: FY0708FY 2007-2008 = $10,680 per year per person, FY1213FY 2012-2013 = $16,620 per year per person. U.S. Department of Labor, Bureau of Labor Statistics, Anchorage CPI-

U for 2007-2012, using half year inflation reported an annualizing on ASD Fiscal Years. We’ve assumed

1.2 percent per half year, or 2.41 percent annualized for FY2012-2013.


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an annual rate 6.8 percent above inflation, which is consistent with UAA ISER’s Report

“Alaska’s Health-Care Bill: $7.5 Billion and Climbing” (August 2011) that estimated the per

person cost to government employers of group medical insurance to have been rising at an

annual rate of 6.5 percent above inflation over the period 2005-2010.2

Some portion of the District’s high rate of cost escalation is attributable to the District shifting to

a self-insured health plan which included an effort to build fiscal reserves. Separating out the

cost of insurance and focus on the underlying cost of claims, we find the cost of claims has

increased 7.6 percent per year over the past five years – or 5.2 percent above inflation.3

In the absence of a change in the trend line, group medical claims costs per person will increase

by roughly 55 percent over the next six years. All other things being equal, this would suggest

that the annual health plan costs to the district will be $25,793 per year compared to $16,620 in

FY 2012-2013.

If health care cost growth per employee were reduced to core inflation for the next six years,

using a combination of rebalancing of reserves and stop loss coverage and active management

of health plans to ensure high value care and enabling employees to participate in effective

wellness programs, future health care costs per employee could be reduced to about $19,274 per

year – a savings of $6,519 per employee – a portion of which could be reinvested in salaries.

At the District level, the difference between health plan costs on the current trend compared

stronger management of the costs amounts to a total of roughly $39 million in FY 2018-2019.

This amounts to over 300 the equivalent of full time positions that would have to be eliminated

to cover the increase beyond inflation.

Pension Cost Drivers

In 2002, the total pension cost per active employee was $4,700 per year. In FY 2012-2013, the total

pension cost per active employee participating in Public Employee Retirement System (PERS) or

Teacher Retirement System (TRS) is now approaching $38,770 a year.4

In FY2011-2012, the total amount of State “on-behalf” payments to the District totaled $91.6

million, or xx of total salaries and benefits. percent of the 5 Approximately 61 percent of the total

2 MAFA analysis of Government Employer health care cost disclosures, 2005-2010 (August 2011).3 ASD analysis of ASD Monthly Health Claims Experience History Reports (2007-2012). Also note thatover the most recent 12 month period the claims to funding ratio (money spent on claims vs. money

collected to pay into the insurance pool) has increased to 128 percent - the District is paying $1.28 out forevery $1.00 being set aside in each payroll for self-insurance [October 2012 Report on Claims]4 The average pension cost per active employee represents the cost we are incurring to cover forwardlooking pension costs for past and present employees.5 See Schedule TT Retirement Systems Employer Relief Revenue by Function and Schedule (FY11/12

CAFR)


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pension cost of District employees is slated to be covered by State “on-behalf” payments in FY

2012-2013, while the balance, 39 percent, is a direct cost to the District.

There are significant differences between the relative contributions of TRS and the PERS to the

District’s total cost of service.

Table 1 – ASD TRS & PERS FTE, Budget and Aggregate Average Wage $/FTE

TRS PERS

FY1213 Budget FTE 3526 2145

FY1213 Salary Budget($Millions)

$248.6 M $86.3 M

FY1213 ($/FTE) $70,512/FTE $40,200/FTE

Teacher Retirement System (TRS)

Teacher pension costs in particular have grown rapidly due to retirement terms which, for

many years up to 2006, included full retirement with health benefits at age 55 after 20 years of

employment. This has created several large cost drivers.

Demographic Cost Drivers

For most of the past thirty years, TRS allowed retirement after only 20 years which created a

large number of teachers who enter and then stay in the retirement pool compared to the

number of employees who are actively working who can contribute into the pool. Many of the

teachers who retired after only 20 years are likely to live for many decades after their

retirement.

Some retired after 20 years, in their 40’s, and are in line to receive health and pension benefits

for as many as twice as many years as they worked.

Challenges Associated With Retiree Health Coverage Before 65 when Medicare Becomes

Primary

Another key cost driver is that many retirees, under the “20 year and out” system, can retire

with full health benefits and receive 20 years of health benefits where TRS is the primary

coverage – before Medicare becomes primary when the retiree turns 65. Others do not retire

until they are 55, after 20-30 years of service. Here again, with TRS providing primary health

coverage up to age 65 whereupon Medicare becomes primary, the cost of health coverage as a

portion of the pension has risen dramatically over the past decade.6 Among those retiring after

20 years at age 55, they are likely to receive pension and health benefits for longer than they

worked.

6 Please see Appendix A: Analysis of TRS Dependency Ratio = Ratio of Retirees to Active Workers.


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Pension Fund Long Run Earnings Projections

Finally, the investment return the system assumes an 8 percent nominal return each year. The

retirement pools have not achieved an 8 percent per year return – falling dramatically behind

that goal with the fall in the stock market frequently associated with the bursting of the “dot

com” bubble in 2000 and again with the fall in market value and subsequent returns attributed

to the recent financial collapse exemplified and amplified by the Lehman Brothers Bankruptcy

in 2008. As a result of the interaction of all of these factors and others, the most recent actuarial

report on the Teacher Retirement System [Buck Consultants, July 2012] indicates currently

unfunded future payment liabilities is on the order of $4.2 billion dollars [$575,106 per active

member, $31,818 per student].7

As a result of the increasingly persistent shortfall, which began about a decade ago, the State of

Alaska has been making supplemental payments “on-behalf” of school districts into the pension

fund in order to attempt to bring the fund back into balance [future payment obligations

balanced by future income].8 The actuarial projection, using an 8 percent annual return

assumption, indicates that the State wide “on-behalf” payments into the TRS will need to

increase from $250 million in FY2011-2012 to $611 million in FY 2028-2029.9 The Anchorage

School District represents around 40 percent of the retirement pool. The State’s on-behalf

payments amount to an increase in cost from roughly $2,270 per student in FY12 to $5,554 per

student in FY29 [averaged across all school districts].

In FY11/12, the State made $91.6 million in on-behalf payments, $80.1 million for TRS and $11.5

million for PERS.

On a TRS budgeted salary base of $248 million in FY 2012-2013, assuming 3 percent per year

aggregate salary growth (aggregate trend encompassing a combination of 2.5 percent inflation +

range + step increases which amounts to $296 million by FY 2018-2019), the State “on-behalf”

7 Total statewide average daily membership was roughly 132,000 in FY12. Total statewide number ofactive members in the Defined Benefit Plan was roughly 7,303 in FY12 [Buck Consultants, July 2012, p.

51]. The unfunded accrued liability as of June 30, 2011 was $4,190,858,000. The Actuarial report doesinclude a sensitivity analysis for higher and lower nominal returns than the 8 percent middle case. We

note that the Center for Retirement Research at Boston College report “The Funding of State and Local

Pensions: 2011-2015”, Munnell, et. al [No. 24, May 2012] has developed pension outlook estimates whichcharacterize 8 percent annual returns as the optimistic case, 5 percent as the middle case and 3 percent as

the pessimistic case. We also note that the Federal Reserve Bank of Philadelphia’s most recent Survey ofProfessional Forecasters forecasts real GDP growth of 2-3 percent over the next four years. When

combined with the long run inflation forecasts, the total nominal GDP growth forecasts range from 5.4 to5.5 percent per year. [Survey of Professional Forecasters, August 10, 2012]8 The persistent nature of the shortfall is illustrated in the Actuarial Report Executive Summary at page 2[Buck Consultants, July 2012]. The TRS Funding Ratio fell from 100 percent in FY2000 to 68 percent in

FY2002 and, at the decade scale, has been trending downward to 54 percent in FY2011.9 TRS Actuarial Report, p. 45, July 2012.


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payments to the District could increase to $132 million by FY 2018-2019 – for a total “on behalf”

contribution of roughly $792 million over six years.

Public Employees Retirement System (PERS)

The challenges associated with the PERS are similar to the TRS, but quite distinct in terms of the

absolute magnitude of the unfunded liability challenge, the relatively modest impact on school

districts compared to other public employers and the “dependency ratio”, i.e., the number of

retirees per active worker.

First, the unfunded accrued liability was $6.9 billion at fiscal year-end 2011, or $260,948 per

active member [Buck Consultants, July 2012, pages ES-1, 54].

One of the key reasons why the size of the unfunded liability per active member for PERS is less

than half of TRS is that PERS was essentially a “30 years and out” retirement system and TRS

was a “20 years and out” retirement system.

Second, in FY 2012-2013 the TRS FTE budget is 3525.5 and the PERS FTE budget is 2187.10 The

average budgeted salary for TRS is roughly $70,000 compared to a PERS average budgeted

salary of $40,000.

Third, the dependency ratio for PERS, while quite challenging in its own right, is not as

challenging as TRS. In FY 2011-2012, PERS had 1.1 retirees per active member in the defined

benefit plan while TRS had 1.5 retirees per active member in the plan.

Potential Long Term Risks of High and Rising Teacher & Public Employee Pension Costs

The high and rising costs for the pension over the next 15 years presents a number of long term

risks to the District.

First, the pension fund contributions are generally seen by State policy makers as a contribution

to education. As a result, the large and growing pension contributions appear to have begun to

crowd out other potential education investments, e.g., an increase in the base student allocation

in the foundation formula, an increased level of high value investment teacher education at the

university, high value professional development, or any number of other initiatives to enhance

classroom effectiveness or increase the pool of highly qualified applicants, especially in high

value areas where the District appears to continue to face recruiting challenges, e.g., AP Physics.

This was most apparent after the recent legislative session when pension fund contributions

were directly referenced as education funding.

Second, to the extent that the combination of high oil prices and high oil revenues does not

persist, the District is at risk for potential reductions in State support as various stakeholders

argue for their share of a shrinking revenue stream. When oil prices fell in 1985-1987, on a

10 FY 2012-2013 Approved Budget, General Fund, Transportation.


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much larger base of oil production and reserves than is present today, the State eliminated the

pension support it had provided districts in the early 1980s.11

In addition, there are a number of large multi-billion dollar capital projects that have been

percolating in public policy discussions that appear to continue to require large multi-billion

dollar public subsidies in order to reduce their apparent price and create the impression that

their “cost” is reasonable. Thus, there remain many programs and projects that may

potentially crowd out education investments, especially education investments targeting

increasing resources to direct classroom instruction and high value support.

Finally, it may be useful to note the challenge presented by the upward slope in pension

payments to reduce the unfunded liability and bring the pension back into balance compared to

the downward slope in oil revenues likely to be available to the State. To illustrate the potential

magnitude of the challenge of growing demands on a shrinking base, we’ve combined the

actuarial projection of long term pension “On-Behalf” payments [Buck Consultants, July 2012]

with the Department of Revenue’s oil revenue forecast, extended by long term projections by

Scott Goldsmith [UAA ISER, August 2012]. Please see Appendix . By FY 2028-2029, when the

children who entered kindergarten this fall might be in their junior year at the University of

Alaska, the actuarial projections suggest the State of Alaska will be spending roughly 30

percent of its total oil revenue on TRS and PERS “on-behalf” payments – suggesting a high

potential for the State’s continued support of pensions to crowd out other spending.

Staffing Level Cost Drivers

Prior Decade

From FY 2012-2013 to FY 2013-2014 enrollment has fallen 1.5 percent (49,520 to 48,792), while

the number of employees has grown 12.8 percent (5520 to 6224 FTE; All funds = General Fund +

Food Service + Grants).

In absolute numbers, the growth in staff was led by 239 new teaching assistants, 172 teachers, 85

technical, 41 maintenance and warehouse and 36 professional positions. In percentage terms,

the professional and technical areas (primarily back office support functions including IT) were

the fastest growing groups – having increased 50 percent over the past twelve years.

Year over Year [FY 2012-2013 over FY 2011-2012]

Year over year the overall number of budgeted positions was reduced by 3 percent, general

fund positions fell by 2 percent while grant funds fell by 25 percent as a result of the expiration

of ARRA funded positions and the wind down of the Jobs Bill support.

11 State of Alaska Comprehensive Annual Financial Reports (1980s-2000s).


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Technical and Maintenance & Warehouse positions declined by 5 percent. Teacher positions

were reduced 4 percent and teaching assistants were reduced 1 percent. One percentage point

of the teacher reductions were from the general fund, three percentage points came from a

reduction in federal grant support.

The recent trend of reductions in federal support may accelerate over the next several years,

especially in light of the potential sequestration of federal funding under the Budget Control

Act of 2011.

Long Run Revenue & Expenditure Scenarios

Long Range Revenue Outlook

Federal Funding

Total Federal Revenue for FY 2011-2012 was $91.5 million. Federal funding for FY 2012-2013 is

expected to decline on the order of $12 million with the expiration of one-time Federal

investments, ARRA and Education Jobs Bill programs.

In addition, under current law, the Federal Government is slated to reduce federal discretionary

spending by roughly 8 percent under what is known as a sequestration process, hereinafter

“sequestration” in January of 2013.12

Scott Goldsmith, citing a George Mason University study of the impact of sequestration on the

states, has estimated that sequestration would result in a reduction of about 3 percent of total

wage and salary employment in Alaska, compared to the nation as a whole were the estimated

job loss associated with sequestration is about 1.5 percent of the total workforce.13

For the purpose of a high level reconnaissance projection, we have assumed that the 3 percent

reduction in total wage and salary employment will drive a reduction in property tax valuation

and a reduction in K-12 enrollment on the order of 1.5 percent in FY 2013-2014 as the reductions

are initially mitigated by local reserves, followed by a regression to the mean where property

tax valuations and enrollment are reduced by 3 percent by FY 2015-2016.

In addition, a number of tax cuts dating back to 2001 (Economic Growth and Tax Relief

Reconciliation Act of 2001) and 2003 (Jobs and Growth Tax Relief Reconciliation Act of 2003) are

scheduled to expire at the end of December. The District is not aware of any publicly available

studies of the impact of the expiration of the tax cuts on Alaska that take into account Alaska

12 Budget Control Act of 2011. Also note that the Congressional Budget Office (CBO) projects that the

Budget Control Act will reduce the Federal deficit by at least $2 trillion over the next ten years.13 E-mail communication, Scott Goldsmith, 31 October 2012


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specific distributions of earned and investment income. At this point in time, our estimates do

not take into account any loss of employment associated with the expiration of the tax cuts.14

The District estimates the net result of the expiration of the ARRA and Jobs Bill programs

combined with initial reconnaissance level estimates of the first year of sequestration to amount

to a reduction of $11 million from FY 2011-2012 (audited) to FY 2013-2014 or approximately 110

full time positions. See figure below.

By the third year of the projection period as the full effect of the sequestration (and expiration of

the tax cuts) flows through the economy, the reduction in the State’s maximum local

contribution under the foundation formula would amount to roughly $2 million a year and the

reduction in State funds associated with the reduction in enrollment driven by lower federal

spending would roughly double to a $7 million a year.

14 We note for the record that Ernst & Young has estimated the expiration of the tax cuts would reduce

GDP by 1.3% and long run employment by 0.5%.


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State Funding

The current trend in State of Alaska funding support is flat nominal base student allocation

($5,680) in the Foundation Formula, small (<$8 million) nominal supplemental grants, and large

and growing “on-behalf” payments to cover the cost of building the TRS and PERS financial

reserves so they can continue to meet their projected payout obligations over the next 20 years.

Federal Sequestration Impact on State Funding

Our baseline projection in State funding assumes current law, which in this case includes

Federal sequestration will go into effect which in turn reduces Alaska GDP on the order of 1.5

percent in FY13/14 percent or more which we anticipate will result in concurrent reductions in

enrollment and local property values.

The reduction in enrollment will reduce Foundation Formula funding, transportation funding

and other smaller grants that are based in part on enrollment. The reduction in local property

values based on the State Assessor’s determination in January 2014 will reduce the State’s

maximum allowable local tax contribution by about $1 million in FY 2015-2016.


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Taking into account the combination of current trends and Federal sequestration, the total State

funding of the District is slated to increase by $39 million over the next six years; $33 million of

the increase is associated with projected State of Alaska On-Behalf pension fund support

payments. Roughly 7 percent of the increase in State funding is associated with the foundation

formula providing an offset of roughly 43 cents for every $1 reduction in Federal Impact Aid.

Another 6 percent of the increase in State funding is associated with an increase in the State

contribution associated with the reduction in the local maximum contribution allowed as

property values decline. Roughly 1 percent of the increase in State funding is associated with

the increase in per pupil rate in the State transportation funding formula.15

Local Funding

The opportunities associated with local funding support changed in 2012 with the passage of

SB182. Previously local funding was constrained by the Municipality of Anchorage tax cap.

With the passage of SB182, the State revised the maximum local contribution permitted under

the funding formula. The net effect of the change for the Anchorage School District in FY 2012-

2013 was to reduce the maximum local funding allowed by $8 million while increasing the

amount available from the State foundation formula by $8 million. Thus the local contribution

toward the General Fund was effectively reduced from roughly $200 million to $192 million for

FY 2012-2013 while the State contribution in total increased from $466 to $474 million.

15 See Appendix __ for State of Alaska Foundation Formula Sensitivity Analysis under Federal

Sequestration


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The net effect of SB182 over the long run planning horizon is that the State formula’s maximum

local contribution has become the governing constraint on local funding under all of the

combinations of local and State circumstances that we’ve examined in our long range financial

model.

Federal Sequestration Impact on Local Funding

We estimate that sequestration will have several material effects on the availability of local

funding for the District over the long term planning horizon.

First, given a risk adjusted assumption of a 1.5 percent reduction in GDP, we expect property

values and enrollment to decline.16 A subsequent decline in property values estimated by the

State Assessor in January, 2014 will reduce the tax base and flow through to a reduction in the

maximum contribution allowed under the State formula in FY15/16local revenues which will

be offset in part by an increase in State formula funding.17 As sequestration continues [it is pre-

programmed to occur for a ten year period in the hopes of reducing the federal deficit], it seems

likely to result in further reductions in economic activity and related property values for those

local economies that are more dependent upon the Federal Government, e.g., Alaska in general,

and Anchorage in particular due to its relatively large share of Federal non-uniformed

employees in Alaska [Federal non-uniformed employment in Anchorage is roughly 9,600 (56

percent) out of a total of 17,000 in Alaska statewide].18Federal Government, e.g., Alaska and

Anchorage and Fairbanks in particular due to the close proximity to both an Army Fort and an

Air Force Base. In addition, Anchorage serves as an administrative hub for many Federal

programs that are likely to be affected.

For the purpose of establishing a risk adjusted base case under current law, we project local

revenue from the Municipality of Anchorage to begin to decline from $199 million as the State’s

maximum contribution calculation begins to flow through the decline in property values as of

January 1, 2013 in the FY 2015-2016 budget to $190 million by FY 2018-2019. Please note that

nominal dollar projections are used so that a loss of $9 million in nominal dollars over six years

is equivalent to a loss of roughly $30 million in purchasing power under a 2.5 percent general

inflation assumption.

16 See for example “Debate Over ‘Fiscal Cliff’ Weighs on Growth”, Phil Izzo, Wall Street Journal, updated

September 12, 2012. Risk adjusted estimates of the impact of Federal sequestration on the U.S. economyrange from a reduction of 0.44 percent (20 percent chance of 2.2 percent reduction in GDP) to 2.2 percent

to 4 percent (assuming sequestration goes into effect). We use 1.5 percent as a risk adjusted placeholderin this presentation of the potential impact on the Municipality of Anchorage pending the outcome of the

national election, legislative developments during and after the lame duck portion of the session, andrefinement and verification of model runs using our simplified version of ISER’s Econometric Model of

the Alaska Economy.17 As property values decline for a Municipality making local contributions to the school district at the

maximum allowable mill rate, the State’s funding formula increases the State contribution.18 State of Alaska Department of Labor (2012 Data).


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Federal Sequestration – Net Impact on Distribution of FundingThe loss of Federal funding associated with sequestration has disparate impacts across

programs, schools and students.

In short, the loss of roughly $7 million in Federal funding has a potential near term impact on a

variety of federally funded programs, including:

Title I – NCLB

Title I – Migrant Education

Carl Perkins Vocational Education

Community Centers Learning Program

Title IIA – Professional Development Program

Title VIB – Education of All Handicapped Children

Title VII – Indian, Native Hawaiian, and Alaska Native Education

Federal Impact Aid [General Fund]

School Lunch Program [Food Service Fund]

The basic strategic choices to address this change in Federal funding include:

Do not plan for redeployment of resources presuming either the probability of

sequestration in 2013 or in future years remains low or that the programs are not critical

to Destination 2020

Deploy District fund balance and/or reserves to backfill some or all of the reduction to

the extent the program is critical to Destination 2020 under the theory that Federal

sequestration is a relatively short-term phenomena


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Shift general fund resources to fill the gaps to the extent the program is critical to

Destination 2020 using a District staffing or funding formula

Challenges with attempting to backfill Federal grants with Maintenance of Effort Rules

One of the challenges with shifting resources to backfill the loss of Federal support associated

with sequestration is a concern that any resources used to backfill will be used to establish a

new higher benchmark against which to measure maintenance of effort.

There are three basic approaches to this challenge. One is for the State of Alaska to file a waiver

of the maintenance of effort requirements if circumstances arise which require a reduction of

funding back down to “prior levels prior to sequestration” under an argument that the State

proceeded in good faith under extraordinary and extenuating circumstances. Attempts to carve

out a “safe zone” within which the District could increase or decrease funds appear to have

been successful only in so far as the safe zone was clearly delineated, maintained and was not

later violated.19

The second approach is to monitor legislative and regulatory developments in anticipation of

the potential for this large national issue to give rise to specific Federal OMB guidance

providing a safe zone for those districts considering backfilling sequestration related funding

reductions.

The third approach is to avoid the risk by deciding not to backfill specific programs and run a

risk with respect to raising the benchmark against which to measure future maintenance of

effort.

The third approach does not appear to preclude a district from taking a fresh look at how it

allocates its general fund resources across different student groups and associated schools –

which may result in increases or decreases in funding allocations and differences in how the

value of each program is measured.

Challenges with attempting to backfill Federal grant programs with “Federal grants can only

be used to supplement, not supplant other funding sources” rules

One of the challenges with shifting resources to backfill the loss of Federal support associated

with sequestration is a concern that any resources used to backfill will be used to establish a

new higher benchmark against which to measure whether a subsequent redeployment of

general funds associated with the restoral of Federal funding would violate the “supplement,

not supplant” principle. Again, the basic challenges are whether to: 1) create and maintain a

good faith safe zone, 2) wait for more definitive guidance from the Federal government or its

granting agencies, or 3) avoid the risk by choosing not to backfill the Federal sequestration

reductions.


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At this juncture in countdown to the implementation of the Federal sequestration process and

uncertainty with respect to Federal guidance, the District recommends against adopting a

financial plan to backfill the reduction in Federal funds given the level of management effort to

sustain a safe zone and the risks that future budgets and expenditures may inadvertently

venture outside the safe zone and accumulate unnecessary risks.

Long Range Expenditure ScenariosIn order to provide a quantitative context for the FY 2013-2014 Pro Forma financial planning

guidance discussion, we have developed four basic long term expenditure scenarios to illustrate

the potential trade-offs that the Board faces over the next six years as we collectively strive to

achieve the strategic goals of Destination 2020.

The following scenarios are not indicative of any decisions or policy guidance received by or

developed by the management team or the board. They are financial scenarios to illuminate the

magnitude of the financial trade-offs involved in the long range planning horizon to help

inform the board when they consider where district finances might be in 2020 and how fast we

should move toward the long run financial goals in the FY2013-2014 budget cycle.

Table 1. Illustrative Long Range Expenditure Scenarios – Bottom Up Assumption Driven

ClassroomInstruction

SupportFunctions

Total FTE Direct $/FTES:$70,500+inflation

B:$37,200 +

inflation + 5%

Support $/FTES:$40,200+inflation

B:$25,270+inflation+5%

Build to 50%2544=>3112 FTE

Reduce to 50%3680=>3112 FTE

6224

Hold at 41%2544 FTE

Hold at 59%3680 FTE

6224

Hold at 2544FTE

AttritionReduction &

Shift to DirectClassroomInstruction

1-4% Per Year

Attrition

Hold benefits to

inflation

Hold benefits to

inflation

Attrition Attrition 1-4% per yearattrition

Hold benefits toinflation

Hold benefits toinflation


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Long Range Staffing Level Driven Expenditure Scenario Results

FY1314 FY1415 FY1516 FY1617 FY1718 FY1819 TARGET

TRS

100.0% 2544 2544 2544 2544 2544 2544 2544

3.0% 70500 $72,615 $74,793 $77,037 $79,348 $81,729 $84,181

5.0% 37200 $39,060 $41,013 $43,064 $45,217 $47,478 $49,852

Millions $284.10 $294.61 $305.54 $316.89 $328.70 $340.98

PERS

100.0% 3680 3680 3680 3680 3680 3680 3680

3.0% 40200 $41,406 $42,648 $43,928 $45,245 $46,603 $48,001

5.0% 25270 $26,534 $27,860 $29,253 $30,716 $32,252 $33,864

Millions $250.02 $259.47 $269.31 $279.54 $290.18 $301.26 FY1819 Index

TOTAL ($M) $514.92 $534.12 $554.08 $574.84 $596.43 $618.89 $642.24 1.00

Growth (FY1213) $19.20 $39.16 $59.92 $81.51 $103.97 $127.32

Growth Index 1.25


TRS

103.4% 2544 2631 2720 2813 2909 3008 3111 3112

3.0% 70500 $72,615 $74,793 $77,037 $79,348 $81,729 $84,181

5.0% 37200 $39,060 $41,013 $43,064 $45,217 $47,478 $49,852

Millions $293.79 $315.05 $337.87 $362.38 $388.70 $416.97

PERS 3112

97.3% 3680 3579 3480 3385 3292 3201 3113

3.0% 40200 $41,406 $42,648 $43,928 $45,245 $46,603 $48,001

5.0% 25270 $26,534 $27,860 $29,253 $30,716 $32,252 $33,864


TOTAL ($M) $514.92 $536.93 $560.44 $585.56 $612.41 $641.12 $671.82 1.05

Growth (FY1213) $22.01 $45.52 $70.65 $97.50 $126.20 $156.90

Growth Index 1.30


TRS

100.0% 2544 2544 2544 2544 2544 2544 2544 2544

3.0% 70500 $72,615 $74,793 $77,037 $79,348 $81,729 $84,181

5.0% 37200 $39,060 $41,013 $43,064 $45,217 $47,478 $49,852

Millions $284.10 $294.61 $305.54 $316.89 $328.70 $340.98

PERS

97.0% 3680 3570 3463 3359 3258 3160 3065

3.0% 40200 $41,406 $42,648 $43,928 $45,245 $46,603 $48,001

5.0% 25270 $26,534 $27,860 $29,253 $30,716 $32,252 $33,864


TOTAL ($M) $514.92 $526.62 $538.75 $551.32 $564.37 $577.89 $591.92 0.92

Growth (FY1213) $11.70 $23.83 $36.41 $49.45 $62.97 $77.00

Growth Index 1.15

Hold Classroom/Hold

Support

Build

Classroom/Reduce

Support

Hold

Classroom/Reduce

Support


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The difference between the basic staffing level driven strategies can be seen in the FY1819 index

on the far right – with the index set at 1.00 for the Hold/Hold strategy. The Build/Attrition

strategy is 5 percent more expensive than the Hold/Hold. The Hold/Attrition strategy saves

roughly 8 percent over the Hold/Hold.

Also note that the Hold/Attrition strategy results in a 15 percent increase in salary and benefit

costs over the FY1213 pro forma baseline.

In contrast, an Attrition/Attrition strategy, assuming 3 percent annual attrition, which amounts

to a reduction of 16.7 percent from FY1213’s approved budgeted level of 6224 FTE, results in a 4

percent increase ($20 million) in salary and benefit costs over the FY1213 pro forma baseline.

Finally, if we hold benefit cost growth to inflation, we can construct plausible scenarios that,

with 1 percent annual attrition for TRS and 4 percent annual attrition for PERS, only require a 2

percent ($13 million) increase by FY1819 over the FY1213 pro forma baseline.

We estimate that the “natural” attrition rate may be on the order of 2-3 percent for the employee

pool. Thus the 1 percent annual attrition for TRS appears achievable. The 4 percent annual

attrition for PERS will require a high level of focus in order to sustain it over a six year period.

The revenue outlook may help sustain that focus.


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Revenue and Expenditure Scenario Results

The baseline long run projection assumes relatively flat local and state foundation formula base

allocation ($5680) and federal sequestration. The combination of these factors and trend line

expenditures yields a fiscal gap of $25 million in FY1213 that grows to $142 million by FY1819.


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Combining the long range financial model revenue and expenditure scenarios yields a few

combinations of staffing level and salary and benefit that come into balance.

For example, assuming “flat” local revenue and base student allocation ($5680) in the State

Foundation Formula and Federal Sequestration on the revenue side and TRS 1 percent

attrition/PERS 4 percent attrition + salary and benefits at 3 percent annual growth on the

expense side yields a projection that is within $9 million (1 percent) of balance over the six year

planning horizon. This is an aggressive projection which requires active management and

realignment of other than direct classroom instruction functions across the organization in order

to hold direct classroom instruction attrition at 1 percent per year.

If federal sequestration is postponed for an indefinite period, the net impact reduces the short

term deficit to $6 million with the potential for a surplus if salary + benefits are held at inflation.


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Strategies to Close the Gap in FY 2013-2014The Superintendent and management team will close the fiscal gap by rebalancing resources

with the goal of aligning the district’s programs with the strategic goals and objectives

embodied in Destination 2020: ASD’s Strategic Plan.

The FY 2013-2014 FISCAL GAPPrior to active management and realignment in FY1213 and FY1314, the projected fiscal gap

for FY1314FY 2013-2014 is estimated at $25 million.

The projected fiscal gap in FY14 2013-20 arises from our analysis of three key financial drivers:

Projected trend line increases in salary and benefits

o The rate of increase in the total number of FTE has moderated as the ARRA and

Jobs bill funding is expiring, though the effect on actual FTE in any given year is

moderated by grant manager practice to withhold roughly 15 percent of their

grants in any given year so they have a reserve to cover potential contingencies

and shortfalls

o The increase in the total number of General Fund supported FTE appears to have

peaked in FY2010-2011 at roughly 5820, FTE and has fallen to roughly 5670, FTE

in the FY 2012-2013 Budget.

For the purpose of our baseline projection, we assume a maintenance

level of 6224, total FTE [5670 GF FTE + 207 food service fund FTE + 347

grant FTE]

o Salaries per FTE may increase on the order of 3 percent per year, reflecting a

combination of inflation, years of experience and educational attainment where

applicable

o Benefits per FTE may increase on the order of 5 percent per year on a total cost of

service basis, and 4.9 percent on a District coverage responsibility basis [without

State of Alaska “On-behalf” pension support payments]

An 8 percent reduction in Federal funding associated with automatic across the board

sequestration reductions

Flat funding for direct classroom instructional support [State of Alaska foundation

formula base student allocation ($5680)] and continuation of growth in the Statewide

“On-Behalf” pension support payments over the next 17 years - from $250 million to

$611 million for TRS and $240 million to $504 million for PERS, for a combined total

increase from $490 million per year in FY12 to $1115 million per year in FY29,

representing a total of roughly $13.6 billion over 17 years.20

20 The continued growth in pension fund payments projected by the State’s Actuarial Consultant [Buck

Consultants July 2012] are driven by a combination of factors including: relatively early retirement


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There are three basic strategic options to close the gap:

Increase revenues,

Decrease expenses and

Spend reserves to the extent the gap is associated with temporary reductions in

funding or one-time opportunities

While the District and its supporters continue to advocate for revenue increases, the prospects

for new revenue sources appears modest in the intermediate term.

As a result, we have the District s developed financial projections of revenue and expense that

start with substantially flat local and State revenue for classroom instruction and a reduction in

Federal spending associated with current law sequestration.

Then current service and staffing levels are then used to establish a baseline against which to

apply key cost drivers and estimate a total cost of service. Illustrative examples of alternative

service and staffing levels to test the sensitivity of key assumptions on staffing and key cost

drivers, e.g., salary and benefits are also provided.

From there, estimated shortfall between the revenue and expense projections under baseline

and alternative scenarios and are provided. A review of potential reserves to cover intermediate

term reductions in revenue or one time opportunities remains.

The resulting range of scenarios should provide some insight into the financial implications of

key choices regarding service and staffing level targets given current revenue constraints.

Enrollment ProjectionsBased on enrollment trends through October 22, an illustrative projection of enrollment has

been developed to provide us with a baseline to drive revenue and expense estimates. It

projects essentially flat enrollment without sequestration and a decline in enrollment with

sequestration. Those projections will be updated when the District budget development

process in November.

followed by long lived retirements compared to the pool of workers supporting the retirees, continued

growth in early retirees whose primary health coverage is through their TRS or PERS pension until theyreach 65 when Medicare becomes primary and the TRS/PERS health coverage becomes secondary,

limited opportunity for active management of health benefits to ensure that retirees are finding highquality high value health care since the benefits *appear as if* they are very low cost before 65 and

“virtually free” – creating the classic conditions for what economics call “moral hazard”, a conditionwhere beneficiaries don’t perceive the cost of their care and treat it as a free good, consuming well in

excess of what is valuable and not discriminating on the basis on quality compared to if they shared some

noticeable responsibility for selecting high value care.


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Seasonal enrollment projections are also available to illustrate the large and persistent

differences in the annual enrollment cycle between divisions and programs. These large

differences in seasonal enrollment may be worthy of consideration as our consideration of the

district develops new tools for allocation of resources.

Expenditure Plan Guidance

Alignment with Destination 2020

The FY 2013-2014 Financial Plan will close the budget gap and align with Destination 2020:

ASD’s Strategic Plan. The alignment will be achieved based on:

o Baseline staffing ratios and class size guidance

o Changes in programs and services not directly aligned on Destination 2020

o Managed attrition

o Redeployment of resources to initiatives in support of Destination 2020

Baseline Pupil to Teacher Ratios

If we apply the current Pupil to Teacher Ratios to the enrollment projection which includes

reductions in enrollment associated with Federal Sequestration, the total direct classroom

teaching FTE shrinks from roughly 1850 this year to 1755 by FY 2018-2019.

If we apply a 1 percent attrition factor on top of the enrollment attrition, the total direct

classroom teaching pool shrinks from roughly 1,850 FTE this year to 1,647 FTE in FY 2018-2019.

The net effect of a 1 percent attrition factor per year on the current PTR guidance yields the

following PTR chart.


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All other things being equal, if we round the PTR ratios up to whole numbers, we reduce

annual expenditures by $4.1 million in FY 2013-2014.

If we round PTR ratios down to whole numbers, we increase annual expenditures by $ 2.3

million in FY 2013-2014.

Baseline Instructional Support & Other Support Staffing Ratios

We have presented two summary staffing scenarios which show the relative FTE across

function in Appendix D incorporate instructional support and local school leadership,

supervision and support.

Fund Balance/Fiscal Reserves

Table 3. Review of Financial Planning Scenarios and Fund BalanceOptions

FinancialPlanScenario

Annual Surplus(Deficit)

Unassignedfund balance

Additionalfund balancepotentiallyavailable

Projected total fund balancein FY 2018-2019 as a

percentage of Total FundBalance in FY 2011-2012

($152.9 Million)

Build DirectClassroomInstruction

$ Million / year $23.7 Million

Hold DirectClassroomInstruction


ManagedAttrition


ManagedAttrition +???



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Financial Planning BaselineIt is the expectation of the management team that the financial plan will be built on most recent

actuals, less adjustment for end of year spending above baseline. The continued use of prior

year budgets as the baseline on which to build the next year’s budget has built in layers of

contingencies which have compounded over time. The management goal isn’t to eliminate

contingencies, but to clearly identify and evaluate their size and scope and make adjustments as

necessary to ensure alignment with Board Priorities.

Financial Planning Guidance to Principals & Administrators

OMB anticipates distribution of the approved Pro Forma Guidance Memo along with a detailed

Budget Development Manual to principals, program directors, and managers with budget

authority among the central administration functions around November 20th. In addition to the

usual detailed instructions concerning data entry into the budget information development

screens of the accounting system, the cover memo will include:

A discussion of the FY1314 baseline which will be based on long run normalized

requirements

A discussion of class size and program effectiveness guidance

A discussion of the identification of potential reductions in programs and services not

directly aligned on Destination 2020

A discussion of managed attrition across schools, programs and central administrative

functions

A discussion and encouragement of redeployment opportunities to align with

Destination 2020

Sound Fiscal Policy & Best Practice Guidance

Please reference Appendix B “Creating a High Performing District Through Execution of Sound

Fiscal Policy and Best Practice” [February 27, 2012, As Amended, ASD Memorandum #195

(2011-2012) attachment] for our most recently revised Sound Fiscal Policy and Best Practice report.


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APPENDICESA. Teacher Retirement System Dependency Ratio = Number of Retirees per Employee

B. Sound Fiscal Policy & Best Practice Guidance

C. Enrollment History & Illustrative Projections

(1) Revenue & Expense Projections

(2) State

(3) Federal

D. Staffing Levels

E. Revenue & Expense Projections

F. Total Cost of Service Compilation – Illustrative Dashboard


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Appendix A: Teacher Retirement System Dependency RatioTeacher Retirement System Actuarial Projections [Buck Consultants, July 2012]

Student Teacher Ratio Estimates (OMB Long Term Financial Model under Flat Funding

Scenario, potential funding increases are crowed out by high and growing pension costs)

TRS Only – State TRS Pension “On-Behalf” Support as a Percentage of State

Oil Revenue


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Appendix B: Sound Fiscal Policy and Best Practices Manual[Under Separate Cover]


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Appendix C: Enrollment History & Illustrative Projections

Enrollment History – Basic Enrollment


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Enrollment History – Elementary


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Enrollment History – Middle


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Enrollment History – High School


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Enrollment History – Alternative


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Enrollment History – Charter


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Enrollment History – Special Services


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Enrollment History – Special Education (SPED) Intensive


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Enrollment History – Special Education (SPED) Intensive Breakdown


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Enrollment History – English Language Learners

Seasonal Patterns – ELL [data received – in process to graph]


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Enrollment History – Native Education


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Enrollment History – Gifted Education


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Illustrative Enrollment Projections

Current Law = Sequestration; Revision/Delay of Sequestration Requires Affirmative Vote


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Staffing Ratio – Illustrative Schedules


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D. Revenue & Expense Projections

TREND LINE EXPENSE PROJECTION


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ATTRITION (1% Classroom/4% Support) + 3% Salary & Benefit Inflation


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G. Expenditure Projections – Cost of Service Drivers – Key Purchased

Services with Escalation Exposure


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H. Expenditure Projections – Cost of Service Drivers – Supplies &

Materials

No material considerations identified in pro forma trend analysis.


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Total Cost of Service CompilationIllustrative Long Range Financial Model Dashboard

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