Juneau School District administrators and board members listen Tuesday to a remote presentation by Lisa Pearce, hired as a budget expert in December, about how her analysis during the past few weeks revealed a $9.5 million deficit facing the district this fiscal year. (Mark Sabbatini / Juneau Empire)

Juneau School District administrators and board members listen Tuesday to a remote presentation by Lisa Pearce, hired as a budget expert in December, about how her analysis during the past few weeks revealed a $9.5 million deficit facing the district this fiscal year. (Mark Sabbatini / Juneau Empire)

School district leaders express shock, anger at $9.5M deficit, say fix by June 30 deadline unrealistic

Board to meet next week to review all non-required expenses, such as student activities, for cuts.

Shock, anger and dejection about a $9.5 million deficit suddenly facing the Juneau School District were expressed by school board members during a multi-hour discussion Tuesday, who said they don’t believe they can fix the problem by the end of June — yet they can’t afford not to because of a potentially massive financial penalty for not having a balanced budget on that date.

As a first step forward, the superintendent is being asked to put together a list of everything the district spends money on that’s not legally required — and thus cut — the board is scheduled to review at a special meeting next Tuesday. Student activities, free student breakfasts, guidance counselors, and classes beyond core subjects like math and reading are among the many potential targets.

Finding out who is responsible and why for a multitude of errors resulting in the deficit revealed during the past few days — including significantly underestimating staff costs and overestimating revenues — were also cited as important by some board members who called the situation unprecedented, but they acknowledged that can’t take priority over the crisis itself.

“It’s paralyzing to even try and understand the size of this,” said Will Muldoon, chair of the Juneau Board of Education’s finance committee. The district normally is supposed to have its budget for the coming year ready in April, but “we couldn’t do this in three years so to have do this in three months, that’s the part I’m super-scared of.”

A shocking revelation of errors

The district now expects about $76.85 million in operating expenses for the current fiscal year ending June 30, plus about a $1.9 deficit remaining from last year — a total of $78.75 million — but only about $69.25 million in available revenue. Furthermore, because more than half of the fiscal year has passed many of those expenses — such as salaries — have already been paid — meaning any cuts during the remaining months will have to be proportionately larger to balance the books.

The magnitude of the problem cast a pallor over school board members as they met for a late-afternoon work session to get a detailed explanation of the situation, followed by their regular monthly board meeting where they discussed options that all seemed unappealing.

“To say that there is some hard news tonight would be an understatement,” said District Superintendent Frank Hauser, reading from a lengthy statement at the beginning of both the work session and board meeting. “The budget developed last spring overstated district revenues by over $5 million. It also understated district expenses by $2.1 million.”

“The truth is that the district must make both immediate and long-term financial changes,” he said, subsequently adding “I will again be honest and say that there is no quick or easy fix here. Nearly 90% of the district’s budget goes for salary and benefits, with nearly all of the 90% going for staff who directly work with students in schools.”

The district’s bleak financial picture was assembled during the past few weeks by Lisa Pearce, hired as a budget expert in the latter part of December following the resignation of Cassee Olin as the district’s administrative services director on Dec. 1.

At that time district officials knew financial problems existed, due to an audit that showed the $1.9 deficit remaining from last year along with ongoing faulty financial practices, but the total potential deficit facing the district was estimated at about $7 million.

A month later that figure is $2.5 million higher, according to Pearce’s analysis.

Hauser and Muldoon declined after Tuesday’s meetings to comment on what role Olin may have played in the crisis, citing confidentially rules about district personnel.

A report presented by Pearce to the board about the revised budget picture shows two major categories where funding for employees was drastically underestimated:

• District contributions to the Alaska Public Employees’ Retirement System (PERS) were underbudgeted by 22% and to the Teachers’ Retirement System by 12.56%, according to the report. “Increases in the amount of $1.1M for PERS and $369,650 for TRS are needed to cover the employer obligated contributions for current staff levels as of 12/19/2023.”

• “Staffing and associated costs for certificated and other staff were significantly under budgeted,” the report states. “Even with unfilled positions, a reconciliation of YTD, as of 12/19/2023, staffing and associated costs will require an increase of $5.012M to cover salary, health benefit costs and other associated benefits for current staff.”

However, Pearce emphasized in her presentation the budget didn’t overlook $5 million in staffing costs — rather, many of them were “miscategorized” and in doing so resulted in additional errors that overstated revenue. She said the true amount of additional salaries and benefits compared to the original budget is about $700,000.

There were also multiple other expenses in the budget that were underestimated such as contracted services — and even a salary for the superintendent was missing. Pearce said.

“Only a part-time classified position was in there,” she said.

On the revenue side, lower-than-expected enrollment meant a loss of about $4.2 million in per-student funding compared to the original budget, according to Pearce’s report. The district also lost some one-time and/or COVID-related funding compared to the past few years, which was factored into the original budget.

No easy path for the next steps

Pearce didn’t make any specific recommendations for cuts or other remedies in her presentation or report. But she told board members spending nearly 90% of the district’s budget on employee salaries and benefits is notable.

“That’s a high percentage by any district standards, but it’s real,” she said. “That’s how we provide the services and schools are a people business.”

Also, she said, realistically the district should be considering a three- to five-year plan to resolve the deficit since doing so in the coming months isn’t realistically possible.

However, Muldoon said while he agrees resolving the problem by June 30 doesn’t seem feasible, the consequences of not doing so could extend and worsen the crisis. Specifically he mentioned the state can withhold the same amount of per-student funding from next year’s budget as the district’s deficit at the end of this fiscal year.

“If we round (the deficit) up to $10 million, say we cut $5 (million) and we carry a balance of a deficit of $5 million, it would reduce our available revenues through state’s foundation formula to the tune of $5 million,” he said. “Combined with the ongoing deficit itself that brings us right back to the $10 (million) and it would be a wash on any savings on that.”

At that point, district officials would be trying to patch the same-sized deficit after already making major budget cuts.

Muldoon said there are other legal considerations as well, including a city ordinance requiring a balanced budget and a district policy requiring a year-end fund balance of at least $1.1 million — although he said the board can vote to waive the latter.

Deedie Sorensen, the school board’s president, said the district has already been dealing with years of cutbacks due to the state essentially leaving the per-student formula unchanged for many years, thus resulting in fewer real dollars to spend every year due to inflation.

“Teachers start buying their own supplies because there’s no money for supplies,” she said. “And we have fewer people doing more things everywhere. Custodians aren’t just working in one building, now they’re working in one and a half. Teachers who were mostly teaching English are now teaching English and (other subjects). We have fewer people in every office, including the central office, to do the work. So we have reached the point where the ceiling has come down on us, it’s crushing us.”

Pearce noted other districts statewide are also experiencing funding crises. Hauser, in his opening remarks, said the board in some ways is prepared for the current crisis because “after years of flat state funding and inflation we had expected that hard decisions would need to be made this year and into the future.”

Gov. Mike Dunleavy, who vetoed half of a one-time 11.5% increase in the per-student formula for the current year, has proposed no increase in the formula in his budget for next year. However, the formula is expected to be a dominant issue of the legislative session that starts next Tuesday.

Options for more local revenue this year are largely nonexistent since the district can’t raise any on its own, and the City and Borough of Juneau is already contributing the maximum allowable amount to supplement the state’s per-pupil funding. City Manager Katie Koester said Monday officials may examine what expenses the city can relieve the school district of, but Mayor Beth Weldon said it appears such options are limited.

While numerous other concerns were voiced by board members about possibilities ranging from being unable to pay teachers during the coming months to a state takeover of the district due to insolvency, the decision about the next step forward came from Emil Mackey.

“What would help me is if the superintendent and his staff basically identified everything — everything — that was not required, as distasteful as it may be,” he said, citing possibilities ranging from guidance counselors to free school meals. He said those are “things that I have supported in the past, things other people have supported in the past. But we need to know every single option or the pain is going to get worse and worse and worse. But I think we have to have that list as soon as possible.”

The special meeting to discuss the list, or however much of it can be completed by then, is scheduled at 6 p.m. Tuesday, Jan. 16, in room 206 at Juneau-Douglas High School: Yadaa.at Kalé High.

“Who’s responsible and how many gatekeepers failed”

While Hauser and other top district officials are emphasizing the need to look ahead to solving the problem rather than how it was caused, David Noon, newly elected to the board in last October’s election, told his colleagues “I’m not willing to treat this like a natural disaster…people gave us bad information.”

“I am incandescent with rage when I think about how it could be possible for an administration to put together a budget that doubled the estimates of PERS and TRS revenue in a single year, and wildly underestimated how much special education contracting services were going to cause,” he said. “I mean these are appalling errors.”

“The people who tripped over their own shoelaces on this made it much more difficult for us to do the things that we need to do in advocating for more funding,” he said. “The public is going to want an accounting of this. Not just the numbers, but who’s responsible and how many gatekeepers failed.”

Muldoon, while agreeing determining responsibility eventually is important, said the current analysis by Pearce doesn’t appear to suggest fraud or other malicious practices occurred.

“The dollars are there, and they were spent on valid required and essential expenditures,” he said. “It’s just that we were wildly off on the amounts, and the journaling and accounting thereof.”

• Contact Mark Sabbatini at mark.sabbatini@juneauempire.com or (907) 957-2306.

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