Chief Financial Officer Ashley Sutton said the district has been using its fund balance, essentially the district's primary bank account, to offset costs — but now, she said, that’s not an option anymore, and she and Superintendent Dr. Charles Foust will have to make reductions to the budget.
“It’s going to be very difficult, and people aren’t going to be happy with the options,” Sutton said.
Foust added that he saw this coming and the district now must come to an “uncomfortable stop” in its spending, saying they can’t pull from the district's fund balance, and he doesn’t “know where the district would find the money.”
This year, he said, budget negotiations with his staff will be a zero-based one, meaning that all expenses must be justified by department heads.
And if not, Foust and Sutton said they would do it for them.
“I told them at the end if it doesn’t come to the number, Ashley and I will do cuts on our own, so we have to make sure that we can get where we need to be in order to have a budget that I can recommend,” Foust said.
He said departments are submitting their budgets now. And that he and Sutton are hoping the board will adopt its budget recommendation in early April. Then, the budget will be submitted to the county commissioners, who must vote to approve the county’s portion of the budget, at around 26%, the second largest funding stream for the schools.
Moving forward, the board will continue having budget workshop negotiations. Sutton said at the January 9 regular board meeting, she’ll ask that the board appropriate a $6.4 million transfer to cover for a revenue shortfall. She said $5 million will come from the district’s ‘local current expense’ fund and $1.4 million from ‘other restricted’ funds.
Sutton also suggested that the board look into having a minimum percentage of fund balance, to avoid this issue in the future; although state law doesn’t require school systems to have this percentage in this account.
Sutton suggested that the state requires counties to have a minimum of 8% of its fund balance on hand — however, that appears to be a common misnomer. According to the state treasurer’s office, there’s an ongoing myth about a state law or Local Government Commission policy requiring or suggesting an 8% reserve in fund balance; the LGC’s recommendation for minimum balances varies, depending on many factors, including the expenditure amount of the government entity. For one example, the Town of Carolina Beach was cautioned by the LGC back in 2018 for dropping to 31% (from a healthier level of around 68%).
New Hanover County has a target of 18 to 21% in fund balance and it’s currently at 21%, but the county has a larger budget ($588 million) than the school system ($390 million).
How the district got here
The district recently had its annual financial audit, conducted by Anderson, Smith, & Wike PLLC.
At the Wednesday meeting, Adam Scepurek, a CPA with the firm, outlined the district’s issues with its fund balance, saying the district’s practice of dipping into this pot of money to balance its budget is not sustainable in the long run, and that the district had to turn “this battleship around.”
Sutton and Foust agreed with Scepurek’s assessment. For the past three budget cycles, the district has had to move an average of $4.6 million from the fund balance into its operating budget.
Sutton explained that going back to 2020, the $6.3 million gain in fund balance was due to FEMA reimbursements from Hurricane Florence — and marked the rollout of the initial state and federal Covid relief funds. The state was also holding the district “harmless” from declining student enrollment numbers, meaning that they were continuing to give them funds based on higher student enrollment projections.
However, starting in 2022, the district was on the hook for paying for the county-mandated teacher supplement increases, which took away from fund balance. The county did provide the funding for these increases; however, Sutton said the commissioners mandated the district spend down their fund balance to help support the increase.
This was also the year that non-certified staff like teacher assistants got a $14 an hour minimum wage and bus drivers were bumped up to $15. At this point, the state still wasn’t penalizing the district for declining enrollment numbers. Sutton has said that the NHCS has lost about 1,000 students since 2020.
Starting in 2023, the district had to account for another hourly increase for non-certified staff bringing them up to $15 an hour and bus drivers to $16.
Importantly, it was also the fiscal year that Covid-relief money was running out — and the district was not held harmless for student enrollment, meaning decreasing numbers translated into decreasing funding.
For fiscal year 2024 (the current budgetary year, running from July 2023 to June 2024), the Elementary and Secondary Emergency Relief Fund (ESSER II) ran out, funding worth $25.5 million. And in the upcoming fiscal year (from July 2024 to June 2023), ESSER III, worth $57.3 million, will also run out — likely in September 2024. Sutton said that means next year the district is going to lose 32 instructional coaches, and some employees who work in dropout services, parent and family engagement specialists, and those in special education services.
Another wrench in the system is a state rule that both virtual and regular charter schools must receive the same amount of per-pupil funding from the public schools. For example, for the last two years, the county has funded the schools at $3,434 per student – this now has to follow charter school students.
Fiscal year 2025 projections
As of now, the student enrollment projection for next school year is for 24,858 students. However, Sutton said that she’s hearing from the North Carolina Department of Public Instruction (NCDPI) that they will be using February 2024 enrollment counts to base fiscal year 2025’s budget.
Last year, the state projected $196 million coming to the district, but after the actual enrollment numbers were in, the state gave only $186 million to NHCS. Federal revenue projections came in closer — they anticipated $52.2 million and they received $52 million.
And because student enrollment is remaining stagnant or dropping slightly — the district will also see a reduction of $1.6 million in New Hanover County appropriations.
The district is also anticipating an average of a 4% employee raise and a 7% increase in health insurance rates.
NHCS 2024 Budget Outlook by Ben Schachtman on Scribd
