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TO: Board of Education
FROM: Jim Scherzinger, Interim Superintendent
DATE: February 25, 2002
RE: Superintendent Budget Message

By nature I am a hopeful person. I was born in Oregon, raised in Oregon, and have spent almost all my life in Oregon. I have seen many times when Oregonians have risen together to the challenges that face them. My hopeful nature has been shaped by these experiences.

Today, in our 150th year, I propose a budget that challenges my nature, questions my hope for our state, and threatens the hopes of our youngest Oregonians.

My nature, conditioned by years, will not change so readily. A careful reader will still find signs of hope in this message. But, in the end, I am proposing $40 million in cuts. I believe they are thoughtfully done. I believe they steer the district in a way that holds true to our strategic mission of raising achievement for all children now and in the future. But they are still $40 million in cuts. They threaten our mission, the future of our city and our state, and the futures of all our children.

It is more important than ever that we make the tough choices needed to realign our resources to continue to focus on our mission. We need to protect kids and the quality of programs as much as possible.

Tonight I'm going to outline the extent of the shortfall and how we got to this point. I'll follow that with criteria for budget decisions along with my recommendations. The recommendations include painful, sobering, unprecedented cuts. However, there are a few areas where I'm recommending allocating additional resources. Instead of across the board cuts I'm recommending a package that better meets the needs of students given the dismal budget picture.



EXTENT OF THE SHORTFALL

When I presented the budget framework to the Board in January, I said that the deficit had reached a critical, mission-threatening moment. Tonight I wish I had better news. However, since January the budget situation has gotten worse. In January we projected that the District would have a 2002-2003 budget shortfall of between $20 million and $50 million. Our best estimate now is $36 million, assuming an $11 million decrease from the legislature.



HOW DID WE GET TO THIS POINT?

Over the last ten years, since the passage of Measure 5 and state school reform, our district has been caught in a tightening vise of rising expectations and declining funding. Our governments, both state and federal, have made increasing promises while, at the same time, cutting and restricting the funding of those who must deliver on the promises.

Despite the funding cuts, we have had some successes. Average achievement scores are up. Many mandated special services are better than they were ten years ago. Some of these successes have come from working harder and more efficiently. But many have come at the expense of students not served by the mandated programs.

Over the last ten years, due to declining real revenue, our General Fund spending per student adjusted for inflation has dropped 12%. But within that, inflation-adjusted spending on special education, English as a Second Language, and alternative education has risen 41%. Furthermore, the district has prioritized classrooms by holding the per-student direct instruction to an inflation adjusted cut of 10%. As a result, spending on all support activities have been cut by even larger amounts, especially text and library books, counselors, curriculum, staff development, building maintenance, school police, and business services. (If Portland voters had not passed our local option in 1999, which went mostly to textbooks and direct instruction, these numbers would be worse.)

In addition, we have supported these reduced spending levels with one-time actions such as selling properties, accepting city and county donations, and securing soft drink contracts, hoping the state funding situation would improve the following year.

In fact, the opposite has occurred. The state has increased its demands on schools while state funding has deteriorated. Since 1990, the state's tax burden has dropped from 12th highest to 6th lowest. Meanwhile, among other things, the state required schools to meet new testing requirements and to teach all students the arts and a foreign language. In response, we have begun work samples, adopted an arts plan, and started a distance-learning language curriculum. We have stretched our declining resources thinner in an attempt to meet rising demands.

Now we are at the breaking point. We have done everything we could to forestall this day. We have already cut the "non-essentials" way beyond what is wise. Short-term actions will no longer work. Now we must make choices that admit that some goals may not be met.

This does not mean that we advocate lower expectations of students or that we disagree with the goals the state has set. Nor does it mean that, because the decisions are unsavory, we are excused from making them wisely. In fact, the need for communicating higher expectations and making wise decisions has never been higher. High expectations are good for kids, good for our future, and good for the economy. Funding them is the wisest investment our state can make.



COMPONENTS OF THE PROJECTED SHORTFALL

Why is there a $36 million shortfall for the 2002-03 school year?

2002-2003 BUDGET RECOMMENDATIONS

The purpose of this budget message is to present to the Board a budget recommendation for the 2002-03 school year. The Board will hold a series of public meetings on these recommendations, deliberate and approve a final budget on March 18.



CRITERIA

Our first strategic plan objective is that all students achieve. In proposing this budget, we believe the highest priority is the relationship between student and teacher. For all students to achieve, a teacher must be aware of the progress and learning style of each student, must differentiate instruction based on the need of each student, and must communicate progress to student, parents, and others. A school must be organized by an explicit plan to facilitate this process. Central functions must be organized to support each school's plan.

To achieve this, we believe that school reform and improvement best occurs school-by-school through a comprehensive process involving all stakeholders. We have many examples in Portland of success using the Comprehensive School Reform Demonstration (CSRD) process and similar school improvement processes such as school wide Title I.

We also believe that when resources are severely restricted, literacy carries the highest priority because, without it, all other learning is more difficult.

To that end, this budget proposal attempts to keep class size as low as possible and supports and reorganizes activities to improve instruction, enhance communication with parents, improve the local planning process at each school, and enable and encourage each school to organize itself to meet the needs of each student.

In preparing this budget, we conducted eight community meetings through the Caring Communities to discuss our budget options. Over 700 community members attended those meeting. We also conducted three employee meetings and I have personally talked and received communications from many others.

Each meeting was different. Some simply refused to accept the choices as inevitable, preferring to spend their time organizing for greater funding. Although I agree with their priorities, as did virtually everyone at all these meetings, we do not have the freedom to refuse to balance this budget.

Those attending meetings within ethnic communities stressed the need for better communications, especially with students and parents that do not speak English, better staff understanding of different cultures, recruitment of ethnically diverse staff and the need to protect disadvantaged students from cuts.

Those who wrestled with the choices emphasized protecting the classroom from cuts, preserving quality rather than quantity, making investments in areas with big future payoffs and that lead to stability, and lobbying to restore short-term state funding to zero cuts and to get long-term stable funding that supports high expectations.

More recently, as the inevitability of large cuts has become more real, I have heard concern about the effect of these decisions on the lives of our employees. I share these concerns. Unfortunately, 85% of our budget pays for the salaries and benefits of our employees and over half of the remaining budget is dedicated to essentially fixed costs such as payments for transportation, debt and utilities costs. There is no way to make cuts of this magnitude without having major effects on employees.

Many of our employees are represented by labor unions. Some of the recommendations below must be negotiated with each union before they can be implemented. I recognize the value and the need for these negotiations.

GENERAL FUND RECOMMENDATIONS
1. Cap the district contribution to employee health premiums at $600 per month. Savings would be $3.5 million in 2002-2003, and $14 million in 2003-2004.
The $600 number is useful because it is close to fully covering an employee and their family under one of our three existing insurance plans. The other two plans would require a larger employee contribution because they are more expensive.
The cost of health care is the single biggest factor in our continuing budget crisis. Since 1999, these costs have increased 65%, shifting more and more resources away from the classroom. Many agencies have already placed caps on premium payments. For example, the Salem-Keizer cap is $475, the Beaverton cap is $488, the Multnomah County cap is $568 and the State cap is $585.
Keep in mind that this and all other recommendations that involve employment issues will need to be bargained with our unions. The intent of this recommendation is to apply it to all union and non-union employees, although the cap could be lower or higher for some employee groups. The savings estimate assumes it applies to non-union employees and union employees represented under contracts that will be renegotiated for next year.
In addition, I'm looking forward to working with them and identifying creative ways to control the costs of our health plans to limit the impact on employees.
2. Contract out all custodial services. Savings would be $4.5 million in 2002-2003, and $5.3 million in 2003-2004.
Our initial research indicates that we can contract out custodial services and save over $5 million per year. Once the transition has been made we expect the condition of schools to improve with more frequent cleaning.
This is a difficult decision because our 300 custodial employees are a part of our school community. They offer help in many ways around the schools and make them better places. Yet, the harsh reality is that employees in this group are victims of a changed economy where pay and benefits for comparable employee groups in the metropolitan area are lower.
As with the first recommendation, this action is subject to a process of negotiations.
3. Eliminate cost of living increases for all employees in 2002-2003. Savings would be $7 million in 2002-2003.
In the spirit of willingness to work together to regain our financial stability and to prevent even more job losses I am recommending that there be no cost of living increases in 2002-2003. This would apply to both union and non-union employees. And again, this recommendation will be negotiated with our unions.
4. Implement a number of administrative efficiencies, central office and instructional program cuts. Make limited additions. Savings will be approximately $5.4 million


Reduce Central and Administrative Support
Savings will be approximately $3 million

Eliminating overhead is always the first suggestion that comes up. Frankly, this is what we have been doing for the past 12 years to help balance the budget. We've cut over 400 administrative employees and we've already cut into bone. If we eliminated the rest of our administrative operation including payroll, facilities, communications, information technology, and all other central support, we'd cut the budget by $21 million. However, those functions would have to be recreated someplace else, probably at greater expense because they would not be centralized. We cannot exist without them.

Still, we have identified approximately $3 million in cuts and efficiencies that can be made. The largest, about $1 million, comes from refinancing our unfunded PERS liability. About $400,000 comes from eliminating pay for performance for senior managers, principals, and other building administrators. About $450,000 comes from reorganization - consolidation of the publication technology office into information technology, consolidation of the audio-visual library with its MESD counterpart, consolidation of grant finance functions into the finance office, and further reductions in payroll to get the benefits of the new Peoplesoft system.

The rest comes largely from reduced support in almost every central office.

Close Two Schools
Savings will be approximately $450,000

I'm recommending that two schools, Youngson and Wilcox, be closed and the move be made over the summer in time to capture savings in 2002-2003.

I recognize that closing schools is heart wrenching and I want to make it clear that I am making this recommendation because the educational impacts of the other options are worse.

Discussion around closing schools has been going on in this district since enrollment started to decline. We are not alone. Other districts in this state have closed schools or are considering closing schools for this fall as well. While we have been very reluctant to close schools, we are now at a point where we need to look at the cost of not making that decision. We need to consider what we're giving up, and we're giving up too much.

The criteria used to determine the schools targeted for closing included:

Youngson's enrollment is 177; Wilcox's is 197. Additional educational opportunities are available to students of schools that are consolidated, such as increased access to counselors, specialty teachers and after school programs. Youngson students can go to Bridger and Wilcox students to Vestal. While these consolidations offer enhanced opportunities for students, they also help the District concentrate its limited maintenance and capital improvement resources more effectively on education rather than buildings.

Eliminate Outdoor School
Total Savings will be approximately $900,000
Net General Fund Savings of about $470,000

The Outdoor School is largely funded from Multnomah Education Service District (MESD) resolution dollars. The funds are in a five-year phase down and most districts indicate that they believe that this year will be the last for the Outdoor School. While Outdoor School has both education and social benefits, its five-day focus on one grade level is hard to sustain given the other choices facing the district.

Due to carryover funds, we have temporary resolution funds available at the MESD that could partially fund Outdoor School next year. The following year, however, we will lose about $1 million in resolution funds. Therefore, due to severe financial circumstances, I recommend we eliminate Outdoor School next year and use whatever temporary resolution dollars that remain to shift information technology and alternative education costs to the MESD.

Increase resources to targeted areas where small investments will yield significant progress toward reaching our most vulnerable students
The cost of these programs is $250,000


While adding services during budget cutting seems counterintuitive, it's not. While we're cutting costs, students are growing and learning, and we cannot afford to overlook the very real needs of our minority population and English Language Learners. I've identified several areas where relatively small investments will yield big results for our students. They are:

These efforts also will be enhanced through additional funding from federal dollars.

The staffing ratio is a specific calculation that doesn't correlate exactly to class size. Class sizes also are reduced through funding of teachers through federal programs, grants and the local option. Nevertheless, an increase in the staffing ratio from 1:28 to 1:30 will have an impact.
5. Increase the staffing ratio by two, from 1:28 to 1:30. Savings would be $7.2 million in 2002-2003.
This is a recommendation that is extremely difficult to make, yet given our dismal financial picture and the other options available, it is included in my recommendations.
The district needs certainty on the staffing ratio in mid-March so the process of establishing schedules, teaching loads and personnel adjustment can go forward. A cut of this magnitude would affect about 100 teachers and could be largely managed through retirements.
6. Shorten the work year for all employees by 8-9 days during 2002-2003, saving up to $12.8 million.
Throughout my discussions with parents, teachers, students and community members I frequently heard "Preserve the quality of the school program and if you have to make cuts that directly affect students, shorten the school year". I also heard that if this option is selected the district should seek to "minimize the impact of a shutdown on kids."
This recommendation is a one time only cut that would result in 8-9 school and central office shutdown days. I anticipate that with this option we would be out of compliance with the State of Oregon for number of school hours. We can only do that for one year. Our community and staff have offered creative ideas to achieve this one-time only cut, but in the end a consistent policy needs to be negotiated with the unions.
The one-time reduction in days for all employees will help bridge the budget gap until the district realizes the full savings from capping contributions to health care in 2003-2004.
I recognize that this option is asking a lot from our students, parents and employees. Our students would close to two weeks of their education and parents would be faced with the dilemma of what to do with their children while the parents are at work. Our employees and their families will need to plan for and adjust to up to 8-9 days without pay. However, given the size of shortfall, reduced days are likely. Again, this is an action I do not want to take, and if the legislature reduces its projected cuts I would recommend closing for fewer days.


OTHER BUDGET CHANGES

Cafeteria Fund

Our food services program (Cafeteria Fund) has for some years has operated with little or no General Fund subsidy. Due to rising costs, especially health care, we are forecasting a deficit in the Cafeteria Fund of about $1.2 million. Even with the measures proposed in this budget, the Cafeteria Fund still faces a deficit.

The Food Services director has brought together a task force to examine the possibility of expanding a comprehensive breakfast program. Federal reimbursement for this program would produce enough revenue to balance the Cafeteria Fund budget. In addition to the fiscal effects, there are real benefits to students from providing breakfast. On the other hand, providing more extensive breakfasts could affect instructional time, transportation schedules and costs, and school cleanliness.

My General Fund recommendations assume no subsidy of the Cafeteria Fund - it can be balanced within its own resources. If this does not occur, the General Fund contingency will have to be tapped.



Federal Funds

Congress recently passed the No Child Left Behind Act of 2001. It identifies new priorities for federal programs that include increased accountability, flexibility, parental choice, and an emphasis on scientifically based research practices. Following the text of this message is a draft analysis of the fiscal effect of this act.



LEGISLATIVE CHANGE

Finally, I am recommending that the District continue to push for legislative change that would help get our district and all districts in Oregon back on solid footing.

Lobby the legislature to bring legislative cuts down to zero.

We have and we will continue to aggressively encourage our legislative leadership and the Governor to advocate for no cuts in education during the special session. Putting school districts all over this state, including ours, into a budget crisis like the one we are now experiencing is simply unacceptable.

Advocate for long-term statewide education funding solution

Education funding is a statewide problem and needs a statewide solution. The district has weathered years of steady retrenchment as our legislature has steadily disinvested in education. In addition to the changes I'm recommending internally, I believe Portland Public Schools must be strong partners with other school districts throughout the state to lead the charge statewide for adequate, long term stable funding. We need to ask "What kind of public education do we want for Oregon's students and what are we willing to pay for?" It's a popular belief among many people that there is some way to reduce spending and get more services. It doesn't work for individual families and it doesn't work for the larger family that is our state.



SUMMARY OF GENERAL FUND BUDGET CUTS

None of the options available to balance the budget are good ones. Because 85% of our budget is in salaries and benefits there is no way to cover a funding shortfall as large as this without asking every employee to sacrifice.

Here's a summary of the cuts or savings (in millions) I am recommending:

Description of Budget Cuts 2002-03 2003-04
1. Cap Health care contributions $3.5 $14.0
2. Contract out for custodial services 4.5 5.3
3. No cost of living increases 7.0 7.0
4. Administrative and Building Support 5.4. 5.4
5. Increase staffing ratio by 2 7.2 7.2
6. Shorten school/work year by 8-9 days 12.7 0
TOTAL SAVINGS $40.3 $38.9

The actions I've recommended today will lead to spending reductions of $40 million. This provides the $36 million we need to balance the budget and an additional amount of $4 million that we feel allows flexibility and options as we enter into conversations with all of our employees. These will be unprecedented conversations. I recognize that we are asking all of our employees to give up a lot on several fronts. But the alternatives are worse.

If we cannot agree to place a cap on health care costs, control cost of living increases or shorten the work year, our only option is to increase the staffing ratio, close down more schools or completely eliminate programs. To achieve the needed budget reductions we would have to increase the staffing ratio by seven students and reduce our teaching staff by up to 400 through attrition and layoffs. This is an almost unthinkable scenario. Instead, we need all of our employees to be our partners in this cost cutting. We can't make the kind of budget cuts we need to make and preserve what's of value in this district without their help.

As I said at the beginning, there are no good choices, only some that are less painful than others. But to the extent that we retain employees, maintain class size and seek innovations that personalize schools and involve students more, the students will stay in school and increase achievement.

We need to make the hard choices now, balance the budget and do the things we need to do to move forward on solid footing.

In addition, our challenge is to continue to show the voters in this state that we are worthy of their trust and investment. We do that not by complaining about the past, but by identifying the personal and professional assets around us and by building upon them. The types of basic choices we make and the way we go about making them and talking about them with each other and our community, will indicate to voters, the people who fund our activities and the people we serve, how ready we are for that challenge.

As I said before, I recognize how tough these choices are. Nevertheless, I believe that our employees have the capacity and strength to make them. My hope is that when we have completed this process, we will have gained an even greater understanding of our joint commitment to our mission, which is to raise achievement for all children.

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