The Rainy Day Fund That Won’t Go Away

Nov. 11, 2016

Two school officials are at odds over how to spend tens of millions of dollars held in reserve. One says the practice hinders students’ education, while the other says it’s part of running a responsible district.

Teachers at Traverse City Area Public Schools and Traverse Bay Area Intermediate School District work together every day, collaborating to make sure children get the best education they can provide.

That same harmony doesn’t extend to the top of the two organizations, where two superintendents, Paul Soma of TCAPS and Mike Hill of TBAISD, disagree over use of a rainy day fund.

The intermediate school district is keeping tens of millions of dollars in a fund balance, a practice Soma says is excessive and irresponsible, and comes at the expense of students’ education. Soma is just one of 16 superintendents at TBAISD. He’s the only one who’s publicly challenged the fund balance.

Hill disagrees and says the money is set aside to ensure TBAISD can continue to offer services to 16 school districts across five counties. Hill said a tag of "hoarding" posed by Soma is unfair, and that the district operates responsibly.

A LONG HISTORY

Michigan’s 56 intermediate school districts, established in 1962, are supposed to act as intermediaries between school districts and the Michigan Department of Education, which doles out school funding.

Intermediate school districts do a lot of behind-the-scenes work for schools and run special-education programs for children with cognitive disabilities. TBAISD helps out with special education at TCAPS, but Soma says it could and should do much more.

The problem, Soma says, is the intermediate school district holds on to too much of the funding it receives.

Because special-education programing is mandated by law but is only partially funded by the state, TCAPS has to cut into other programs to make up for the roughly $3 million annual shortfall it costs to run special-education programs in the district.

Soma says at TCAPS tight school funding has led to bigger class sizes and worn-out textbooks as money piled up in TBAISD coffers.

Strained special-education funding causes problems across the district, said Jame McCall, associate superintendent of student services at TCAPS. That’s because specialeducation needs must be met whether there is money in the budget or not.

"If I have students who need, let’s say, a one-on-one assistant, that costs $40,000," McCall said. "I have to provide that one-on-one assistant, even if my budget line is zero."

That means that the budget gets cut elsewhere. Students have to pay more for sports and other extracurricular activities, and the spectrum of courses offered by the district is diminished.

"There are classes that we don’t offer because of finances," McCall said. "Let’s say that we had a student or two or three or 15 that needed an advanced German class. Finances will dictate that we cannot offer that class."

Soma said he spent almost a decade attempting to resolve the disagreement quietly. Hill began building a fund balance at TBAISD almost as soon as he took over as superintendent in 2007, and Soma has questioned the practice from the beginning, long before he was superintendent. When Soma was promoted to superintendent from chief financial officer in 2013, he could not get Hill or the TBAISD board to change its policy. The dispute simmered behind the scenes for years until the 2013-2014 school year, when the TCAPS board of education voted against approving the TBAISD budget, taking the argument public.

"There are a lot of hardworking, fantastic individuals that work for the ISD, so this is not about the vast majority of the staff implementing great programs," Soma said. "This is fundamentally about leaders at the ISD who are too far removed from the work that’s being done at the local level. That’s what this is about. They need to be more in tune with what it’s like to sit in a staff meeting in which we’re talking about the budget and saying, "˜No, we can’t add to your social studies curriculum this year, again, for the 14th straight year.’"

"˜WE WOULD BE AROUND FOR TWO YEARS’

When pressed to defend the fund balance, Hill noted what his agency does with the money it does spend – it operates four special-education programs and a career tech center as well as programs in general education, technology, business, adult education and early childhood education. It sends specialists into schools to ensure teachers are properly prepared and 23,000 students in five counties are getting the best education possible.

Hill said TBAISD could not cover all of the special-education costs at TCAPS. "Well, we could, but we would be around for two years," he said. "That would deplete our budget, our fund balance, in two years. It’s not sustainable. Then we would be the ones going back to the voters and saying, "˜Will you increase the special education from from two mills to three mills, please? Because we’re out of money.’" Soma, however, insists a restructuring of TBAISD finances so districts receive special-education funding each year wouldn’t solve all of his district’s woes, but it would make a meaningful difference.

"There isn’t any reason that we shouldn’t have been able to (replace textbooks) over the course of the last 10 years. "¦ Seeing (those) extra multimillion dollars just continuing to feed into the coffers there, I just kept thinking every year, "˜Oh, at some point they are going to recognize that this money would be better off distributed back to locals to help us with these hard times.’ And it simply hasn’t happened."

AGREED-UPON DRAWDOWN

Hill maintains TBAISD has responded to concerns about the fund balance, and three years ago enacted a plan to draw down the cash reserves.

The fund balance was as high as 62.6 percent in 2012.

It was 59.8 percent in 2014 when the drawdown began, or $36.5 million.

"They asked us to set a target," Hill said. "We did research, and we felt that 30 percent (fund balance) was a very responsible place to be, because we don’t compete with our local districts for bond funds."

Hill says his board needs a larger fund balance than school districts because it pays for construction projects as it goes unlike the local districts, which ask voters to approve millages.

Hill said the district looked at other intermediate school districts and found some with lower fund balances and some with higher ones. He said 30 percent would be safe and enable the district to maintain its facilities and tackle new construction projects as they need to happen.

"We just completed a $3.2 million renovation within our special-education department at our life skills center for students with disabilities. A long overdue renovation. We didn’t go out and bond and ask you and other taxpayers, myself included, to pay for that construction," Hill said. "It comes out of the fund balance."

Hill said the fund balance enables the intermediate school district to upgrade technology, tackle unexpected expenditures and be prepared for increases in special-education students into intermediate school district programs.

The formula was designed to disburse some excess funds at a declining rate over the years to draw down the fund balance to 30 percent.

As it worked out, TCAPS got around $700,000 the first year and less than half of that last year. TCAPS is expected to get something in between those numbers this year.

"We recommended to all the superintendents, please, do not put that (first year’s) number into your budget, because given the five-year drawdown recommendation by the school superintendents, each year is going to be less," Hill said. "That was the nature of the five-year drawdown that the superintendents were adamant that we not crash this into the mountain here. "¦ And TCAPS put the $700,000 into their budget last year."

Soma said he doesn’t believe TBAISD is following the formula it set up, and a 30 percent fund balance keeps too much money locked away.

Philip Boone, assistant of director state aid and school finance at the Michigan Department of Education, said the only legislated guideline for fund balances is that if one dips below 5 percent, that triggers state supervision of the school district. There are intermediate school districts that carry 6 percent balances and others that hold onto 60 percent.

Otherwise, Boone said, state school business officials generally recommend fund balances of 10 to 15 percent, though Boone said he can understand why a district would want to have a higher fund balance in order to fund construction projects, if it could swing it.

"We’ve never, as a state, put forth what we thought was an appropriate fund balance," Boone said.

BUILDING A TYPHOON FUND

Jason Tank, a financial adviser with a degree in mathematics whose wife, Jennifer, works for TCAPS, has made it his mission to expose what he believes is unjustifiable stinginess on the part of TBAISD.

He said a 30 percent fund balance is indefensible, and Hill and the TBAISD board exaggerate their financial situation in order to be able to stockpile more money.

"It’s like building a typhoon fund, not a rainy day fund," Tank said. "They are overly conservative multiple times over."

Tank said he was aware of the funding dispute, but he only got involved after Jennifer, a teacher’s aide at a Glenn Loomis Elementary, came home from a district advisory council meeting concerned about TBAISD finances. "She said, "˜This ISD thing is a big problem. They’re hoarding money.’" Tank comes from a family involved in education – his grandmother served on a school board downstate, and his father served on the TCAPS board years ago. Tank soon found himself obsessed with TBAISD’s finances.

"It called for someone to do a deep financial analysis from outside the system," Tank said. "I could easily look at the data and see it. This is an organization that’s sitting on piles of money. What’s going on?" Tank attended TBAISD board meetings.

He attempted to interview the superintendents of each of the districts. He contacted state officials and called other intermediate school districts.

"I talked to anyone and everyone that I could to understand the situation," Tank said. "At the end of an hour and a half meeting with Mike Hill I had reached the conclusion that I am not done researching this and told him that."

He produced a 14,000-word report, viewable at tbaisdreport.com, that argues the TBAISD should draw down its fund balance and pay the money to the school districts so they can fill in deficits caused by special-education programs. He says that could be a start to fix the problem the state’s special-education funding policy has caused at TCAPS. Once that occurs, Tank believes, the districts could consider going after a special-education funding millage.

Tank’s proposal would cap the fund balance between 10 and 15 percent and immediately disperse $15 million to schools.

So far, his work hasn’t gotten much traction at TBAISD other than a letter Hill sent to employees that argued Tank’s website would only divide the community. Hill touted TBAISD accomplishments without addressing any of Tank’s criticisms.

Tank said the reaction from Hill and TBAISD has been deafening silence.

"It’s as if they don’t care to know the facts," he said.

SOME DEFENSES

In an interview with the Express, Hill defended the intermediate school districts against several of Tank’s critiques.

Tank says TBAISD cherry-picked districts with the purpose of justifying a high fund balance. Hill said it merely looked for districts of comparable size. Tank said TBAISD used inflated budget projections in order to justify sending out less money to the districts under the drawdown plan. Hill maintains it used ordinary budget projections.

Tank said TBAISD has hired a consultant to justify cash reserves for future construction projects that are considerably more ambitious than any other district in the state. Hill said he wasn’t sure what other districts have planned, but he doesn’t believe that this is true.

Of the consultant, Hill said: "He is very credible across the state and the country. We would not make the investment to tell us what we want to hear. That just doesn’t make any sense."

Tank said Hill and the TBAISD board have constantly shifted their justifications in response to his criticisms without addressing his report directly.

"The actions of the ISD have been to dig deeper, hire a financial consultant, and hire a PR firm in an attempt to justify something that’s not justifiable," he said.

Meanwhile, Tank has decided to run for the TBAISD board this year, though, given his criticism, that might be a long shot. The seven-member board is elected by TBAISD’s 16 district superintendents, not voters – another fact that’s drawn criticism from Tank. The board is not directly accountable to taxpayers and is overseen by a board chair, Joseph Fisher, who’s served on the board for 38 years.

Still, Tank hopes to get named to the board somehow. "I believe that people are capable of seeing what I see," Tank said. "I don’t think that when you put seven intelligent, good people together, that you can’t come to the right conclusion on this story."

"˜NEVER SUPPOSED TO DEPEND ON THIS’

Kingsley Public Schools Superintendent Keith Smith said he is fed up with Soma’s criticism. He said most of the other intermediate school district superintendents are too. Last year, eight of them walked out of a TBAISD board meeting while Soma was speaking, Smith said.

"The districts were never supposed to depend on this money or budget this money," Smith said of the fund balance drawdown. "It just seems very odd to me that one district has just become very interested in everyone else’s operations. It seems to me that they should be interested in cleaning up their own shop first."

Smith noted that TCAPS agreed to give teachers a new contract that included a phased-in raise of 1.5 percent. If they can afford to do that, Smith said, then Soma should not question TBAISD finances.

"The amount that they’re giving out in raises is significantly more than the couple hundred thousand that they’re squawking about in the paper," he said.

Smith said he hasn’t approved a raise for teachers in the six years he’s been superintendent because budgets have been so tight.

"Do my teachers deserve a one-and-ahalf percent on-schedule raise? Absolutely," he said. "But if I can’t afford it today or one or two years into the future, then it’s irresponsible to do that."

Smith said he’s managed to keep his district solvent through austerity, privatization and outsourcing services.

"If the end game of this is that they want some type of millage or enhancement millage, then be honest about it," he said.

McCall, the associate superintendent at TCAPS, noted that even after the raise given to TCAPS staff, the district’s teachers still earn less than teachers at Kingsley or TBAISD.

Elk Rapids Schools Superintendent Steve Prissel said he believes the intermediate school district does a great job providing services to schools and doesn’t believe the agency is holding on to too much cash reserves.

Even if the fund balance was drawn down to nothing and the money was given to the districts, that would still be just a one-time payout.

ANOTHER LEVEL OF DISAGREEMENT

Also at issue is how TBAISD aids its special-education programs through services rather than cash payments.

Hill agrees that special education doesn’t get as much funding as it needs. But he said TBAISD helps its districts to close the funding gap.

"We have 200 itinerant special-education professionals who serve our five counties. These are school psychologists, therapists, occupational, speech, physical, teacher consultants, behavior specialists," he said.

"Two hundred folks, at 17 and a half million dollars a year in costs, that go out and serve our local districts. All right?" Of those, 51 are assigned to TCAPS.

TBAISD also employs three special-education administrators who serve the district.

They also pay the salary and benefits for an associate superintendent.

Soma said that while he appreciates the work of those professionals, TCAPS would be better off getting cash so that it could run its own programs.

"One of the problems with that large of a balance is it doesn’t create any incentive for efficiency," Soma said.

"I believe people are working hard. I believe people are trying to do the best that they can do. But when you’re operating from a 6 or 7 percent fund balance perspective, like TCAPS is, we really have to understand the return on the work that we do, the return on investment, the academic return on investment, how meaningful and impactful programs are, what type of business model we’re using. Are we getting the most bang for our buck?" Soma said that’s not the case at TBAISD:

"When you’re operating with 30-plus, 35, 38 percent, and dollars are coming in to add to your fund balance, there’s not an impetus to say, "˜Hey, could this be streamlined?’ And I would tell you that I think that programmatically, there’s some streamlining that could happen at the ISD. "¦ To truly get down to the brass tacks of it or the core issue, we need the resources."

Hill said he was disappointed to hear that complaint from Soma, and he considers it an insult to his staff. "If he or anyone else believes that we are inefficient and the services they get are inefficient, then we need to discuss that as professionals, as a regional team. "¦ My first reaction is disappointment, but there’s a process to communicate those concerns, and we’re willing to have it any time," Hill said.

"If there’s a more efficient model to provide our services, outside of writing a check from (the) fund balance that we have no control on what is the return on that investment back to the district, let’s have it."