Back on November 21st I wrote “Letter from County Executive Ball To The Board of Education Concerning Emergency Legislation To Effectuate A Budget Augmentation” and the Howard County Board of Education has responded with the following:
Dear County Executive Ball:
This letter is in response to your November 20, 2019 letter requesting additional information on the budget augmentation to reduce the Health and Dental Fund deficit. The Board appreciates your inquiry about the immediacy of addressing the long-standing deficit in the Health and Dental Fund, to which as you know were the subject of ongoing discussions with you and your staff throughout the FY 2020 budget process and dating as far back as May 2017 when Dr. Martirano brought attention to this situation. We are also pleased that our staffs met on October 25, 2019 to discuss specifically the deficit, adverse audit opinion, and the district’s intention to use all available unassigned fund balance to take decisive action on this matter. During this meeting, Howard County Government staff also indicated that they would like to see HCPSS use its unassigned fund balance as a strategy to reduce the deficit. The rarity and irregularity of a governmental agency receiving an adverse opinion from the independent auditors highlights the significance of this matter. Our collaborative leadership is necessary to meet our fiscal stewardship responsibility to Howard County and to see that this deficit is reduced as quickly as possible and ultimately eliminated. Responses to each question are provided below:
Emergency Legislation Justification
Dr. Martirano transmitted HCPSS’s request to Council Chair Rigby asking for the County Council to use the legislative processes available to introduce and pass the budget augmentation and transfer the funds to the Health and Dental Fund as expeditiously as possible. We will defer to the County Council to deem if this matter is an emergency action. The Board Report prepared by staff used the term emergency legislation based on conversations with County staff about how this action can occur expeditiously. It is staff’s understanding that while the Charter has a certain definition for “emergency legislation,” that it is up policy makers to decide when a legislation should move through the legislative process quickly. Considering the FY19 adverse opinion, we feel strongly that we must demonstrate decisive and urgent action to reduce the deficit from $39.2 million to $24.0 million within FY 2020.
The outcome of the FY 2019 audit is final. No subsequent action will remediate the adverse opinion for FY 2019. However, expeditiously approving the use of all the unassigned fund balance will be a decisive step to significantly reduce the deficit within FY 2020. We believe taking this action illustrates and documents that our governing bodies have given the highest priority to begin remedying the matter in FY 2020, outside of the regular budget process. And, such clear action will mitigate the risk of another adverse audit opinion for the FY 2020 CAFR.
Further, appropriating the unassigned fund balance will prevent it from being used for other budget items. While the County’s proposed FY 2019 budget used $10 million of the unassigned fund balance for recurring costs, we do not believe that using one-time funds to pay for recurring costs is a fiscally prudent strategy. In fact, the pressures of balancing the budget using one-time funds has taken us down this path before. With an adverse opinion, it is critical that we use the unassigned fund balance to specifically address the Health and Dental Fund deficit.
Use/Transfer of 100% Unassigned Fund Balance
Using all available unassigned fund balance demonstrates the highest priority to this matter. Additionally, because the deficit is a non-recurring expense, applying unassigned fund balance is a prudent use of these types of dollars. If some of unassigned fund balance were held back and used to balance the FY 2021 budget, those dollars would go to recurring expenses, as the fund balance applied in the FY 2020 budget did. This approach will compound future budget problems by continuing a structural imbalance between revenues and expenditures. Using the unassigned fund balance to reduce the deficit does not compound future budget problems. It is an opportunity to significantly reduce the Health and Dental Fund deficit.
The independent auditors issued the adverse opinion for the following reasons:
• The Health and Dental Fund owes the General Fund $20.7 million and HCPSS has not demonstrated its ability to repay the amount in a reasonable amount of time. This $20.7 million makes up about one-half of the $39.2 million deficit in the fund;
• To avoid the adverse opinion, HCPSS needed to demonstrate the intent and ability to address the repayment and deficit prior to the end of the fiscal year end June 30, 2019.
This latter point on intent and ability was central to the auditor’s opinion. Though the Board has demonstrated intent to address the deficit, it does not have the full ability. HCPSS does not have the appropriation authority to raise funds. Conversely, HCPSS cannot cut its way out of $39.2 million deficit without eroding educational service levels permanently. The use of $15.2 million will reduce the $20.7 million interfund loan to $5.5 million and the overall deficit to $24 million. Through our discussions with the auditors during Audit Committee meetings and the November 7, 2019 Board meeting, it is critical that we demonstrate a step towards eliminating the deficit. In addition, as noted in the November 7, 2019 Board Report (attached), the Superintendent is going to continue to look for savings via a spending and hiring freeze to find additional savings within FY 2020 to further decrease the interfund loan portion of the deficit.
Impact of HCPSS General Fund Budget in FY 2020 and FY 2021
Using all the unassigned fund balance means these funds would not be available for other uses in FY 2020 or FY 2021. While our preference would be to keep an emergency reserve for unforeseen circumstance, we believe the adverse audit opinion necessitates the use of these funds. As long as there is a $39.2 million deficit in the Health and Dental Fund, HCPSS is in a precarious financial position that necessitates difficult choices. The Health and Dental Fund deficit is the product of underfunding staff health insurance costs so that funds could be used in the General Fund for other expenses.
The Board’s FY 2020 budget request did not propose using any one-time funds for the operating budget; the use of one-time funds was advanced through the County’s adopted operating budget. As you stated, the use of the unassigned fund balance to reduce the Health and Dental Fund deficit also means that there will no opening fund balance available to use for the FY 2021 Operating Budget. Consequently, the FY 2021 operating budget will have at least a $12 million deficit. As a result. the Superintendent is developing his recommended budget without any use of one-time funds to cover projected FY 2021 expenditure growth. We anticipate this fiscal strain and the Board will discuss the impact during its deliberation of the Superintendent’s recommended FY 2021 budget.
While one path would be to use the $15.2 million for the FY 2021 Budget, this path would only lessen a projected operating budget deficit, not eliminate it. And, the costs of taking this path would be the lost opportunity to take significant action on the Health and Dental Fund deficit along with the risk exposure of another adverse auditor opinion in the FY 2020 CAFR.
We appreciate the opportunity to provide you this additional clarification.
Kirsten A. Coombs, Vice Chair
Howard County Board of Education
Here is the PDF version of the text above: CLICK HERE
Now the question is…how will the County Executive respond or will he just move forward in one way or another?
Anyone else find the various “official” letters between the school system, the board of education and the local government administration odd? Maybe it has always happened this way and just not been as public as it is today…or maybe this is just a weird relationship between these entities.
I look forward to seeing what happens at the end of all of this relating to the use of that money. I will follow it the best I can in the future.