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What Exactly Is a Contingency Budget?

From a Purely Financial Perspective, The Vote is Really About $441,166

The Manhasset School Board’s proffered budget of $81,094,279 for 2009-2010 represents just a .87 percent increase over 2008-2009. The board, as is required by law, has also set forth a smaller contingency budget in the amount of $80,642,369 that would be adopted in the event the proposed budget is defeated. Many have asked how this is possible if the law provides for a contingency budget that may contain increased spending of as much as 4 percent.

The short answer is that is what the Education Law provides. While a school board has the right to impose a 4 percent increase in spending in the aftermath of a defeated budget, it also has the discretion not to do so. And that is what the Manhasset School Board, and other school boards across Long Island, is doing. It is simply not the case that when voters defeat a school budget that, as proposed, is less than the statutory limit, the contingency budget automatically defaults upward to the statutory limit. If the voters defeat a proposed budget that is, as is the case with the Manhasset school budget, less than the statutory cap, the budget ultimately adopted--also called an austerity budget--will, in fact, be less than that proposed budget.

One might well ask why so many of us, including educators and administrators, are puzzling over the ins and outs of contingency budgets. The answer lies in our Great Recession which has forced school boards to propose budgets that are less than the statutory cap. In recent years, as the economy was on its relentless upward trajectory, school boards across Long Island were proposing budgets that exceeded the 4 percent cap. Today, these very same school boards are proposing these leaner budgets in recognition of the dire economic times we face as a nation and as a community. In what is both a financial and political decision, school boards across Long Island are voluntarily offering up self-imposed contingency budgets lest they run the risk of having their budgets defeated and facing the opprobrium of a community that is shrinking its own budget.

A word about this statutory cap of 4 percent, which acts as an upper limit on contingency budgets, is necessary. It is actually one of two alternative dollar limits on a contingency budget. The cap is determined by performing two arithmetic calculations, comparing the two results and limiting the budget to the lower of the two calculations. One potential limit caps any increase in the new budget at 4 percent over the last year’s budget; the other sets the bar at 120 percent of the Consumer Price Index for the previous year. The CPI for 2008, which has been determined to be 3.8 percent, yields a cap of 4.56 percent for the 2009-2010 budget year (or 120 percent multiplied by 3.8 percent (or 1.2 x 0.38)). Therefore, the applicable cap for the 2009 budget is 4 percent.

And, in some respects, this quantitative cap is not really a cap at all since certain expenses, such as the costs of debt service, tax certiorari proceeding and court judgments and certain others, are not subject to the cap.

When the proposed budget exceeds the applicable statutory cap, and the budget is defeated, this statutory limit becomes the initial limitation in calculating the ultimate budget. In addition, under a contingent budget, only funds for teachers’ salaries and those expenses that are necessary to operate and maintain the school are properly included, and what the law calls “non-contingent” expenses must be removed from the budget. This deduction of non-contingent expenses is a further downward adjustment on the budget that is ultimately adopted.

To illustrate the calculation, if, hypothetically, the Manhasset School Board had proposed a budget with a 6 percent increase, and that budget had been defeated, a contingency budget based upon the 4 percent cap would have started with $84,065,144 as its initial baseline. From that starting point, any non-contingent expenses would have been deducted to arrive at a final contingency budget.

However, when the proposed budget is less than the statutory limit, that 4 percent limitation becomes irrelevant and it is the proposed budget itself that is the starting point for the budget ultimately adopted. In effect, the lower proposed budget is its own cap. Then, just as is the case when the statutory cap acts as a limit, if that budget is defeated, it is then further reduced by eliminating those types of expenses deemed to be non-contingent. Thus, since the board’s proposed budget of $81,094,279 is less than a budget derived under the 4 percent cap, that figure becomes the base line for the contingency budget from which further reductions are made. As required, any non-contingency expenses are subtracted from that base line to arrive at a final contingency budget. The board concluded that $441,166 of certain equipment and other capital expenditures and $10,744 of certain salary increases are non-contingent expenses and deducted these to arrive at the contingency budget $80,642,369.

From a purely financial perspective, the vote on May 19 is really a vote about $441,166.

Should the community nonetheless vote down the proposed budget, the Manhasset School Board will have three choices. It can immediately adopt the contingency budget; it can resubmit the same budget for a second vote; or it can resubmit a modified budget for a vote. If it elects to resubmit the same or a modified budget and that budget is defeated, then a contingency budget is imposed as a matter of law.

Looking ahead to next year, should the annualized CPI for all of 2009 track the first quarter figures, then the 4 percent cap will not be the lower limit. At present, there is virtually no increase in the CPI for the first three months of 2009, and it is quite possible that it will show a decrease for all of 2009. Thus, a CPI cap based upon that math would either permit no increase or would actually require the baseline contingency budget to be lower than this year’s adopted budget. In last week’s Manhasset Press, the Citizens Advisory Committee on Finance (CACF) explained how the Manhasset School Board was able to hold the line on increases, and noted that the manner in which pension costs are calculated--on a five-year rolling average--has helped to mitigate the more recent poor investment returns. However, as the higher returns of the earlier years continue to be replaced by the ongoing poor returns, the formula by which contributions to teachers’ pension contributions are calculated will move against the Manhasset School Board. This mathematical inevitability, when coupled with a deflationary CPI, will make the Manhasset School Board’s budgeting task increasingly fraught for 2010 and beyond.