2 Big Reasons MA Schools Face a Budget Crunch

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Across the state, school districts are dealing with budget deficits and funding shortfalls due to the expiration of pandemic-era assistance programs and decreased state aid to public schools. Many cities and towns are scampering to bridge the financial gaps through budget cuts or Proposition 2 ½ overrides. 

How did things get so bad? Though it may seem that the bottom has suddenly fallen out of every public school district’s budget, this problem has been simmering for some time and can be traced back to two specific factors. One is a cap on inflation adjustments to education budgets under the state Chapter 70 program, which is the primary source of state funding for public K-12 schools. The other is the 2020 Covid-19 pandemic.

Chapter 70 and the Student Opportunity Act

Massachusetts’ efforts to modernize its public school funding formula contained in M.G.L. Part I, Title VII, Chapter 70 resulted in the Student Opportunity Act (SOA), passed in 2019 after years of legislative discussion and debate. The SOA was meant to eliminate inequitable funding between wealthy and low-income districts. Over seven years, $1.4 billion would be dispersed to public schools in pursuit of that objective.

While some disadvantaged communities found relief through the SOA funding model, early data showed problems attaining the law’s goal of eliminating funding disparities statewide. In 2020, a joint study by the MA Business Alliance for Education and the Greater Boston Chamber of Commerce showed that Chapter 70 aid for FY 2021 was not evenly distributed, with many wealthier districts getting disproportionately more than low-income areas. 

Another problem concerns the recent rate of pandemic-induced inflation that has eroded funding under the SOA model. Whereas state law allows for increases tied to inflation, it caps the rate of inflation at 4.5% (see “Foundation Inflation Index”). As this recent analysis by the Massachusetts Budget and Policy Center shows, inflation over the past two fiscal years has hovered between 7% and 8%. The analysis estimates that the FY 2025 state budget needs $465M to close the funding gap. The budget currently awaiting the governor’s signature comes up short as it includes an additional $317M in Chapter 70 funding.

 Special Funding helped Schools Weather the Pandemic

For the past few years, federal pandemic relief dollars flowed to states and their communities, including Massachusetts. Public schools and other Local Education Agencies (LEAs) such as charter and virtual schools received assistance through several federal/state agencies and programs, such as:

1. Federal Emergency Management agency

1. 5/18/23: $5.2M for Covid test kits;

2. 1/31/24: $64M for Covid School Testing;

3. 2/13/24: $13.5M for Covid School Testing;

2. Elementary and Secondary School Emergency Relief I, II, and III Funds (ESSER I, II, and III);

3. Remote Learning Technology Essentials Grants (RLTE) that supported remote learning;

4. School Reopening Grants (SRG).

It's important to note that not all school districts and Local Education Agencies (LEAs) received equal amounts of Elementary and Secondary School Emergency Relief (ESSER) funds. This is because the funds were intended to provide greater support to low-income districts. Data available on the state website indicates that some school districts received no ESSER fund allocations for one or more of the three dispersals. 

Additionally, certain districts still need to claim their total funding allotments and have until this September to commit the allocated funds for ESSER III, or risk losing the money. Committed funds may be spent through December 2024 or, if an extension is granted, through March 2026.

Panic Sets in as Temporary Funding Ends

In early 2023, experts began predicting a "funding cliff" for state school districts–a crisis related to the expiration of temporary funding sources meant to assist schools with pandemic-related expenses. 

For many school districts, the crisis has arrived. Schools that created new programs and staff positions funded with ESSER money must find new funding sources or terminate programs and lay off staff. 

Of course, districts were aware that ESSER funding was temporary, so its expiration should come as no surprise to anyone. In some cases, the use of temporary funds for ongoing expenses is a major contributor to the current crisis, as highlighted by a recent Western MA News article comparing Northampton and Holyoke public school districts.

Northampton faced a $4.77M shortfall in its public school budget, a problem explained on the city’s website by Northampton Mayor Gina Louise Sciarra: “The deficit has grown in recent years because recurring expenses were covered with non-recurring revenues. Federal pandemic relief has been spent.” 

The article’s authors contacted the Northampton School Committee’s vice chair who confirmed the Mayor’s description of the district’s budget dilemma. She also acknowledged that the district knew not to fund permanent positions with temporary money, but felt they needed to do so. 

The authors’ conversation with the Holyoke Superintendent of Schools yielded a different view. The district is not in crisis since it did not create new, permanent positions that could not be supported once the temporary funding ended. The Superintendent also noted that SOA money helped Holyoke maintain temporary ESSER positions until that funding ends. He expects that only those temporary jobs will be cut once the funding runs out.

When comparing the demographics, we see that Holyoke, with a population of 38,238, has a much lower median household income of $49,007 compared to Northampton, with a population of 29,571, and an income of $80,981. When checking the ESSER data page, we find that Holyoke's total allocation of funds was $57,919,513, significantly higher than Northampton's  $5,229,522. 

Despite receiving a large cash infusion, Holyoke avoided becoming dependent on temporary funding and averted a budget crisis through careful planning.

As for Chapter 70, the law must be amended to adjust for inflation. As taxpayers and citizens, we have a right to expect the state to contribute its fair share to our public schools. If you agree, let your legislators know!

Municipal Audits Support Good Governance

 

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Municipal audits may not be glamorous or exciting, but they offer taxpayers crucial insights into the financial operations of Massachusetts cities and towns.

According to Massachusetts General Law (M.G.L.) Part I, Title VII, Chapter 44, Section 40, the accounts of all municipalities should be audited annually. Those of regional school districts must be audited annually or biennially (though this M.G.L. indicates regional school audits must be annual).

MA Division of Local Services (DLS) recommends annual financial audits but notes that smaller municipalities may opt for audits only every other or every three years. In the latter cases, auditors will likely charge higher fees due to the increased complexity of these audits. To comply with the federal Single Audit Act, any non-federal entity expending $750,000 or more of federal funding during the previous fiscal year must submit to an audit.

Here is a quick overview of the financial audit process for cities and towns, including some highlights from Shutesbury’s fiscal year (FY) 2019 and 2021 financial audits, which I requested from the Shutesbury Town Clerk.

What Happens During a Municipal Financial Audit?

A municipal financial audit independently assesses a community’s financial performance and standing. The municipality engages a Certified Public Accountant firm to examine its “financial records, accounts, business transactions, accounting practices and internal controls” and ensure adequate controls are used to protect public assets. Financial documents included in audits are balance sheets, revenue and expenditures statements, and fund balances. 

The municipality’s audit committee (Shutesbury does not have one) should be responsible for hiring the auditing firm and should not be comprised of town officials whose activities or performance may be audited.

The three basic segments of an audit are:

1. The auditor’s opinion certifies that the audit used documents prepared under generally accepted accounting principles (GAAP). An unqualified opinion denotes an audit where the financial statements fairly reflect the local government’s standing and the auditor found no problems with the documents. A qualified opinion is the opposite and means that the auditor lacks confidence that one or more transactions followed GAAP.

2. Basic financial statements including all government financials, fund financials, notes to the financial statements, and supplementary information and schedules.

3. A management letter. This document, prepared by the auditor, points out any deficiencies encountered during the audit and makes suggestions for improvement. Not all audits contain a management letter, which must be separately included in the scope of services. The DLS Guide to Financial Management for Town Officials recommends including such a letter so weaknesses may be rectified immediately.

Why Audits are Necessary

Regular municipal audits are essential for several important reasons. As mentioned earlier, a primary motivator is ensuring that checks and balances exist to protect the community's assets and that all financial statements, transactions, and controls are fair and reliable. Audits can point out minor problems that can be corrected before they become major issues.

Shutesbury’s Municipal Finance Guidelines delve deeper in its "Audit Policy" section, emphasizing that regular audits ensure the integrity of departmental policies, increase public confidence in local government, and provide evidence to credit rating agencies of the town’s financial health. It also states, “The Town will put forward its best efforts to address, with corrective action, comments, and issues presented in the auditor’s management letter.”

DLS recommends that audits be presented by the auditor to the town council or select board during an open meeting. Many municipalities post their audits and management letters (if available) on their websites.

If a community needs help with its financial controls or wants a more thorough financial review of its procedures, it can ask for assistance from the Massachusetts Department of Revenue.

Shutesbury’s Most Recent Audits

Shutesbury contracts for an audit every two years, and these Select Board minutes from 12/19/2017 contain the presentation of the FY2017 audit by auditor Tom Scanlon. During that discussion, the Management Letter was referenced and Mr. Scanlon suggested the town develop an “internal controls manual” to document these procedures. The Town Administrator agreed with this suggestion. It is unknown whether this occurred since a thorough search of Shutesbury.org did not turn up such a document.

Neither the FY2019 nor FY2021 audits contain a Management Letter, despite the directive in the Municipal Finance Guidelines. Both audits received an unqualified opinion from the auditor regarding the integrity of the documents presented. I found no Select Board minutes indicating either audit was discussed at an open meeting.

Audit Focus and Highlights

Before we get to the notable aspects of the audits, here are some relevant definitions taken directly from the Scanlon & Associates audit reports:

• Deferred Outflows: This represents the usage of net position applicable for future period(s) and will not be recognized as expenditures until the future period to which it applies. 

• Deferred Inflows: Represents an acquisition of net position that applies to a future period and so will not be recognized as an inflow of resources (revenue) until that time.

• Net Position: The difference between all assets and deferred outflow of resources and all liabilities and deferred outflows of resources. Over time, increases or decreases in net position may serve as a useful indicator of whether the financial position is improving or deteriorating. Put simply, 

• Net position = all assets + deferred outflows - liabilities

• Net position represents the difference between resources and the claims against them and can be positive or negative.

• Governmental Funds: Governmental fund statements focus on near-term inflows of spendable resources, as well as on balances of spendable resources available at the end of the fiscal year. Such information may be useful in evaluating a government’s near-term financial requirements.

• General Fund: The General Fund is the Town’s primary operating fund and the largest source of day-to-day operations. NOTE: This corresponds to the last line of a given fiscal year’s budget, titled “Total Operating Expenses” and “Total Revenue Projections”. In a balanced budget, the two lines should be equal.

The financial highlights and changes between audits as stated by Shutesbury Town Management are shown below. 

• Shutesbury’s assets and deferred outflows of resources exceeded its liabilities and deferred inflows of resources by $6,473,807 in FY2019 and by $7,908,530 for FY2021 [Amanda’s note: This shows that Shutesbury’s net position increased between FY2019 and FY 2021 by $1,434,723, a positive indicator of the town’s financial position]. 

• Governmental funds reported an ending fund balance of $2,896,621 for FY2019 and $4,729,293 for FY2021;

• The General Fund balance for FY2019 was  $2,360,482 and $2,824,940 for FY2021;

• Certified Free Cash for FY2019 totaled $1,389,680 and $1,173,772 for FY2021.

Audit Costs

The FY2021 budget document lists the cost for the FY2017 audit as $12,500 and the FY2019 audit as $25,000. The FY2021 audit cost $12,500 according to the budget for FY2023.

This post is a simplified overview of the audit process and two specific audit reports for Shutesbury. For those who would like more detail and don’t mind wading through 70 pages of text and figures, I encourage you to obtain your own copies from the Shutesbury Town Clerk at townclerk@shutesbury.org.