With a state budget shortfall threatening to force painful cuts to Northfield’s schools, the district finds itself in a strange position: hard-won financial health may be weakened by Minnesota’s precarious fiscal situation.

To understand what may lay in the district’s future, it’s worthwhile to look back to its recent past. The Northfield School District hasn’t always been solvent; in fact, seven years ago it was in the educational equivalent of bankruptcy.

A look back

Superintendent Chris Richardson recounted that history—a history that includes unfortunate, if not careless, fiscal policy and a long, difficult road back to solvency.

Richardson joined the district in the summer of 2004. At the time, the financial situation seemed rosy. But three months into his tenure, as he and Tom Stringer, director of business services at the time, looked deeper, they saw the numbers didn’t add up.

“The message was, something’s not right here,” Richardson said. Contrary to what he’d been told, the reality was that in 2004-05, district expenditures were $2 million above revenue.

“We really had very little wiggle room but we did make some cuts,” Richardson said.

With no fund balance on which to draw, the district was headed for bankruptcy. “Statutory operating debt” is the term used in Minnesota for a school district that is spending at least 2.5 percent more than it’s taking in during one fiscal year.

When a school goes into statutory operation debt (SOD), state law requires that the Department of Education intervene. Officials require the district to create a plan to get out of debt, and closely monitor the process.

“You have them always looking over your shoulder and saying, ‘What are you doing?’” Richardson said.

That winter, district officials put together a plan for getting the district out of SOD, using what Richardson called a program-based budgeting process. They broke the 2005-06 budget into five pieces: district operations, special education, athletics/activities, and the biggest part of the budget, elementary and secondary education.

Then, the district called for volunteers to form a team of 15 to 20 people for each program area. The teams included school administrators, faculty, staff, parents and other community members, as well as students—”all the stakeholder groups,” Richardson said. The intent was that stakeholders would feel some ownership in the process, rather than it appearing to be only “insiders” making the decisions, he said.

“I think that because so many people were involved ... they understood that there weren’t easy answers,” said Northfield School Board chair Kari Nelson, who was a board member during that difficult period.

Each team went through their respective budgets line by line—some 10,000 items providing for salaries, supplies, benefits, services, equipment—and ranked them in importance. From there, they were expected to make 12 percent in cuts. The cuts were also prioritized in 1 percent increments so that their priorities were heeded if it became possible to restore anything lost in the first round of cuts.

Then, each program proposal went to a review board for consideration as a whole. They in turn proposed to the school board a budget that was 10 percent below that of the 2004-05 school year. It laid off 20 staff members and reserved money to begin building a fund balance—a savings account of sorts.

The following year the district cut another 4 percent, meaning that the budget was 14 percent lower than when the school had gone into SOD in 2004-05.

The district was on the road to financial health.

Impact of state funding changes

Meanwhile, changes at the state level have made it increasingly difficult for the district to maintain its optimistic financial outlook.

During the 2000-01 school year, the Minnesota legislature changed school aid so that 100 percent of the basic formula came from the state. Local property tax no longer figured into it.

While this shift from local to state funding may have been welcomed, the legislature failed to create a new revenue stream to pay for it, Nelson said. The lack of new revenue meant that school aid “flattened,” she said, and districts could no longer count on the more typical 2 percent increase.

Instead, aid fell to a 1 percent increase in 2008-09 and to zero for the next two years. If next year’s increase is zero, the cumulative effect is a 9-percent decrease in state aid since 2007-08, Richardson said.

In addition, the timing of state aid payments has changed in recent years. Normally schools received all their state aid for the current academic year during their July to June fiscal year.

But starting in 2008-09, the state paid only part of its promised aid to districts during that academic year, pushing 10 percent of it to the following year. The amount deferred rose to 27 percent in 2009-2010 and to 30 percent in the current school year. This, Richardson said, is when having a fund balance is crucial—in essence, a loan from the district to itself to cover expenses until state aid is fully paid.

Districts that don’t have a fund balance must borrow money at interest to cover the shortfall. While it’s not unusual for a district to borrow, Northfield’s fiscal stewardship has allowed them to avoid borrowing since the 2005-06 school year, he said.

Accounting for about 40 percent of the state budget, education funding is subject to the numbers games legislators use to make the budget appear flat. In effect, the legislature is balancing the budget on the backs of the schools, Richardson said.

The chronic underfunding of education is a distinct departure from the Minnesota Miracle—laws enacted in 1971 that restructured Minnesota’s fiscal policy in order to assure an educated workforce—the “engine” of an economy, he said.

Looking ahead

Compared to many districts in the state, Northfield is in an enviable position. The district’s “savings account” stands at $7 million. It has staved off steep cuts in staffing or programming. It’s managed to avoid going to the taxpayers to make up for the decrease in state aid and in fact reduced the next levy by nearly 2 percent.

As illustrated by Northfield’s neighbor to the north, the Lakeville school district is dealing with significant cuts—$15 million in the next two years that mean losing teachers, programs and possibly a school.

“I think you’re going to see a lot of schools going into SOD, having to borrow … and [make] fairly massive budget cuts,” Richardson said. “That’s going to get played out over and over in the state.”

Exactly what impact upcoming state school aid cuts will have on the Northfield district is impossible to know. But it appears that recent lessons will help district decision-makers avoid the trouble that took them many years to correct.

“It’s gonna get tough, and I think you need to prepared for that,” Richardson told the board at its Jan. 10 meeting.

Ray Coudret, a high school math teacher and president of the local teachers union, agreed.

“We have to deal with this together,” he said.

Dealing with the coming budget will require mental, emotional and time commitments from community members, Nelson said.

“We don’t want to be kicking the can down the road,” she said.