Budget deficit projected at $14.5M

While the North Penn School District has benefited in one way from the sudden drop in interest rates related to this month’s coronavirus outbreak, it’s left a big hole in another part of the district’s budget.

“With a zero percent tax increase, we were looking at about a $13 million deficit. That $13 million becomes $14.5 million with the investment income adjustment we need to make,” said Director of Business Administration Steve Skrocki.

“We’re going in the wrong direction at this point, unfortunately,” he said.

In January the school board saw a first draft of staff’s 202021 budget with projected expenses of $282.5 million, expenses projected at $269.6 million, and a gap

between the two of $12.8 million before any tax increase. Roughly $4 million of the increase would go to salaries, another $1.7 million for retirement expenses, and a tax increase at the state-approved Act 1 index level of 2.6 percent would generate roughly $4.8 million toward filling that gap, with a special education exception adding another $1.5 million.

Skrocki told the school board on March 19 that, while it’s too soon to know the full impact of the coronavirus and related closures on the district, some impacts are already clear.

The biggest hole blown in the budget so far has been on the line item for interest earnings on investment income, from keeping district reserves in various bank accounts. With the budget assuming market rates around 1.75-to-2 percent but recent rate cuts bringing those down to near-zero percent, Skrocki said, those rate cuts have had a “severe effect on our investment income.”

“Our rate is tied to the high end of that Fed fund range. Right now, that Fed fund range is at zero-to-0.25 percent, so that means the majority of our invest-able funds will be at 0.25 percent,” Skrocki said.

“Just two weeks ago, our invest-able funds were at 1.75 percent, so that’s a major reduction, a major impact in next year’s budget. We’re estimating we need to lower investment income in next year’s budget by $1.5 million,” he said.

As of the end of February, the district’s total cash balance was roughly $127.5 million, a figure about $6.5 million less than at the comparable time the year before. Board member Cathy Wesley asked if that drop was specific to one area or line item, and Skrocki said it was not.

“It’s spread throughout all areas of the budget, actually, and it’s not just the expenditure side, it’s the revenue side as well,” he said.

Compared to 2019 levels, 2020’s budget has seen a decline in real estate transfer tax revenue, which Skrocki said could be a leading indicator for the rest of the economy.

“Homes are not selling, properties are not selling, like they were in recent years. And now that gap has the potential to grow for the rest of the year,” he said.

The 2019-20 budget was passed last summer with a projected $6 million deficit, Skrocki told the board, but with variance from budget to actual figures and lower expenses than anticipated in certain areas, that gap could narrow.

“We don’t think it will be $6 million at the end of the fiscal year. We’re thinking it might be closer to $3 million, but that’s still not necessarily a positive trend you want to be in,” he said.

Board member Al Roesch asked if sudden short-term job losses due to the state’s shutdown of all nonessential economic activity had been included in budget drafts yet. Skrocki said it had not yet, but could in future drafts.

“We’re going to go back and revisit, now, a couple of line items in the budget,” Skrocki said.

Those revisions could include lowering the amount for the district’s real estate tax collections, which usually come in at around 97 percent of projections, but could now come in closer to 96 percent, a difference of several hundred thousand dollars. Another change would be on the earned income tax revenue, which is tied to jobs in the district, and real estate transfer taxes could also see a sudden drop.

“Those are the three areas we’re going to reevaluate, and in all likelihood lower our projections,” he said.

Savings from a possible refinancing of two bonds borrowed in 2018 and 2019, or any changes to state funding for cyber and charter schools, had not yet been included in an updated draft of the budget, according to Skrocki, and more information on the impact of the coronavirus and associated building closures could be available in April.

North Penn’s school board is scheduled, for now, to next meet at 7 p.m. on April 7 and the finance committee is scheduled to next meet at 6 p.m. on April 6, both at the district Educational Services Center, 401 E. Hancock St.

“We’re going in the wrong direction at this point, unfortunately.” — Director of Business Administration Steve Skrocki