Click chart to enlarge image.
The School District of New Rochelle has embarked on a 7 year spending binge that has produced a 2009/2010 budget that is $30mn to $40mn above spending levels consistent with the rate of inflation. The District based its supersized spending increases on larger then normal gains in housing prices. When the housing market began to turn in 2006/2007, the District failed to make any meaningful downward adjustments in spending. The failure to anticipate this shift in the housing market will have negative implications for years to come.
Last week I received an e-mail from the New Rochelle PTA urging me to support the budget. Within that e-mail the following statement was made. “The 3.2% proposed increase is the lowest in 12 years; lower then the consumer price index at 3.8%” This statement is blatantly untrue as the CPI (as of April 2009) is currently -0.7% year over year. As a result of this comment I thought it might be interesting to examine District spending on a real basis (nominal spending less CPI inflation). I was able to obtain the last seven years of spending data. I also created a CPI average that mirrors the academic school year (September to August) I would highlight that 2/3’s of data exists for the 2008/2009 period so it is pretty simple to get a good idea of what CPI will be for the entire period. The 2009/2010 school year is a different story. One needs to use forecast data to come up with a CPI calculation. Simply taking 2008 CPI data and inserting it into 2009/2010 budget projections will not do. For this analysis I took the average of several Wall Street forecasts for the September 2009 to August 2010 period to arrive at my CPI number. 2008/2009 CPI will be roughly 0.7% year over year (with risks it will be lower) and the forecast average for 2009/2010 is roughly 1.0% year over year. These projections are nowhere near the PTA claim of 3.8% year over year.
The graph above consists of three lines. The blue line is the path of budget spending. The pink line is what budget spending would have been if it were indexed to the CPI. The red line is what spending would have been if it were indexed to the Case-Shiller New York City Area home price index. I adjusted both the CPI (pink) and Case-Shiller (red) lines to account for increases in School enrollment. The graph clearly shows that increasing home prices was the driver of spending in the 2003 to 2007 period. This was likely done on the premise that “home prices never decline”. Little or no consideration was given to movements in CPI or other macro economic drivers. The key period was in 2006/2007 when the housing market began to turn. Rather then take caution, as an extremely overvalued real estate market started to rollover, and reign in spending the District continued to increase spending as if there was no problem. This likely stems from the fact that the District makes no effort to forecast or anticipate forward economic conditions. As is evident from the PTA budget flier the District uses backward looking economic data to make forward projections. That is not a winning strategy in my view. Couple this with a School Board in which the majority of members have limited financial experience it should come as no surprise that we find ourselves in this situation.
The housing price index (red line) has normalized to the CPI index (pink line). However, both the red and pink lines are far away from the blue line (current spending). This gap represents $30mn to $40mn that the New Rochelle taxpayer is on the hook for. We are here today because of a School District that has spent money at a rate more then three times the inflation rate on the belief that housing prices would never decline. In 2008/2009 spending growth will be in the area of 8 times the rate of inflation. The “fiscally responsible” 2009/2010 budget likely will increase spending at 3 times the rate of forecast inflation. This type of thinking is no different then the strategic business models that were employed at AIG, Fannie Mae or Lehman Brothers. These firms aggressively invested capital on the basis that housing prices cannot go down, look where they are now.
The taxpayer of New Rochelle has absorbed this uncontrolled spending for years and will continue to absorb it unless something is done now. The path to change begins on May 19th by voting down the proposed School budget. The path continues by demanding accountability, inclusion, fiscal responsibility and transparency. The process ends by replacing the arrogant and exclusive representatives of the current School Board with candidates who are inclusive and have skills in finance and technology. Candidates who will lever the rich and diverse skill set that can be found in our community and expand overall community participation in the public education process. In my view there is nothing anti-child about that.