HCPSS Eliminates Health Fund Deficit Two Years Ahead of Schedule
July 12, 2021
This press release is being sent jointly by the Howard County Public School System and County Executive’s Office
Ellicott City, Maryland — Howard County Public School System Superintendent Dr. Michael J. Martirano, joined by Board of Education Chair Dr. Chao Wu, County Executive Calvin Ball, County Council Chair Liz Walsh, and system and county leaders, today announced the school system’s health fund deficit will be eliminated this year (fiscal year 2022) – two years ahead of schedule.
The deficit, which began in 2015 and was first discussed publicly in May 2017 by then newly hired Superintendent Dr. Michael J. Martirano, grew to $39.2 million before a combination of several efforts were implemented to halt the continuing deficit growth. The first step was to begin to fully fund actuarially projected health insurance costs and then begin to pay down the deficit. In 2019, a plan was jointly developed by the Superintendent and County Executive to eliminate the deficit by fiscal year 2024. Using savings within the school system’s operating budget, a one-time infusion of funds from the Howard County Government, and a lower-than-expected claims experience in fiscal years 2021 and 2022, the health deficit will be eliminated in this current fiscal year (July 1, 2021-June 30, 2022) with an estimated $5 million positive balance if claims are consistent with actuarial projections.
“This deficit has significantly constrained our operating budget for several years and limited our ability to adequately fund several priorities,” said Superintendent Martirano. “Eliminating the deficit became an immediate top priority for me and Board of Education members. Today truly is a momentous day as we can celebrate that our commitment and collaboration has finally addressed this deficit and that the Howard County Public School System will not be hampered by this looming deficit year after year. It is our responsibility and the responsibility of all future leaders in our county to ensure that our employee health care costs are fully funded.”
“The School System’s Health Fund Deficit represented a significant fiscal challenge that our Administration and County Council had to confront upon taking office. In just 3 years, we have accomplished something truly remarkable: we have taken a near $40 million deficit and turned it into a projected surplus of over $5 million,” said Howard County Executive Calvin Ball. “Our Administration, School System and Board of Education faced a daunting challenge, met it head on, and resolved the issue working together. I am proud of the work we’ve done to eliminate the Health Fund Deficit and am thankful to have good partners like Dr. Martirano, the members of the Board of Education, and our Howard County Council to make today possible.”
“This was not a problem created by this Board or this Superintendent, but it was ours to fix,” said Board Chair Wu. “Since 2017, this Board of Education has prioritized fully funding the actuarially projected health insurance costs, preventing the deficit from growing. We will continue to prioritize the health benefits that our employees receive and engage in sound financial practices to ensure we never find ourselves in this position again.”
“The County Council has shared consistently with the Superintendent’s and Board of Education’s goal to eliminate this health fund deficit as quickly as we possibly could,” said Liz Walsh, County Council Chair. “So much so that we voted unanimously in support of an amendment to dedicate an additional $2.5 million to this exclusive purpose. We can now all turn our attention to fully funding the present needs and future needs of our county school system and the children in our care at this very moment and for generations to come.”
The Superintendent detailed several collaborative efforts to eliminate the health fund deficit:
The efforts of the Board of Education’s steadfast commitment to fully funding the actuarially projected health insurance costs to stop the deficit from growing
The County Executive and County Council’s collaboration by dedicating significant contributions to deficit reduction
The strategic budgetary measures that were put in place to generate year-end savings in the HCPSS General Fund to help pay down the deficit
Unanticipated health cost savings in the Health Fund producing operating gains
“Today truly is a momentous day as we celebrate that our commitment and collaboration has finally addressed this deficit and our budgetary focus will not be on getting out of a multi-million dollar debt but on how the budget can support the very important programs and services that our students and staff need. This includes implementing the Blueprint for Maryland legislation and welcoming back all of our students back to school next month to normalized instruction,” added Martirano.
Some Retrospect and Prospect after HCPSS FY 2020-2021 Budget Vote
By Dr. Chao Wu,
Board Member, Howard County Board of Education
Summary:
After the FY 2020-2021 budget vote, I reflected and wrote a short essay on this. Hopefully this will help and guide us for the next year’ HCPSS budget discussion. The article has the follow sections:
FY 2020-2021 Operating Budget Snapshot
Funding Increase Needed for FY 2021-2022
Funding Category is Complicated
More Communication to the community
Future Budget Process Improvement
County Tax and HCPSS Budget
I want to thank every teacher and staff members who have been working really hard during this unprecedented time. I want to give every teacher a raise, a competitive salary among neighboring counties. I want to raise our substitute teacher salaries to be competitive with other counties too.
Unfortunately, we have to make a budget based on how much money we have and what we can do. We are not laying off any staff. Job security for our staff is my number one priority in this challenging situation. We are still providing an average 2% salary raise for teachers and 1% for AMT staff. We are ramping up support for special education. We are fully funding the health care cost and gradually reducing the historical health fund deficit. We are able to continue on the equity path to provide quality education to all students. As an intermediate solution, we are seeing another class size increase for three consecutive years unfortunately.
I thank our staff, the superintendent, and all bargaining units, who have come together and make the budget happen.
After the vote, I have been self-reflecting on the budget process and where we can further change and continue to improve, especially for our future budget.
FY 2020-2021 Operating Budget Snapshot
The board unanimously adopted its FY 2020-2021 budget on Thursday, June 18,2020. The operating budget is 918.7 million, an increase of 17.2 million over FY 2020. We used a 5 millionfund balance for FY 20-21 budget. Among the efforts:
adding 106.8 new positions for special education
increasing employee compensation on average by 2% in the bargaining units, with 1% increase for non-represented(AMT) staff
accelerating HCPSS’ diversity, equity and inclusion work through addition of three new positions
funding actuary projected employee health insurance cost fully, for three consecutive years
Unfortunately the class size will be increased for the third consecutive years. On average, elementary school will increase class size by one in FY 2020-FY 2021. Middle school and high school will increase class size by 1.25.
Funding Increase Needed for FY 2021-2022
I have been asking HCPSS staff to project our future funding needs. Instead, I created a short table as follows with explanations below. Please note this is not an extensive or complete or accurate list. This is a rough projection.
Budget Increase Need Per Year
Amount
Student Growth Budget Need (800 new students)
10.22 million ***
Fully Fund Health Care
5 million
Possible COLA Salary/Step Increase for Our Workforce
6 million
Total
21.22 million
Student Growth Cost
Board Approved Tuition Rate: In-State Elementary/ Secondary in the amount of $10,650 and Special Education in the amount of $31,950.
Each year, the school has around 800 new students, where 10% are special education students. The total county cost for student growth is around 10650*720+31950*80 = 10.22 million.
So we need to invest extra 10.22 million dollars to catch up with the student growth each year. Please remember the county funding formula (MOE) for HCPSS is using the student population from the previous year such that this extra 800 new students are not funded in the formula. This is the common problem for many school systems which see a continuous student growth and the funding increase could not catch up with the increased need.
This section may be updated depending on how this calculation is revisited based on feedback from our staff and other people. Another calculation I am thinking is to use the average per student cost, which is around 16k. Then the total is 16k per student per year * 800= 12.8 million.
Health Care Cost Increase
On average, the health care cost increase is around 5 million dollars per year. In some years, it was an 11 million dollars increase.
Salary/Step Increase
In the past 10 years, our workforce has received a salary increase between 1% and 5%. That is the reason I am writing a possible 1% increase at least. The 6 million dollars is an estimate based on this year’s 2% salary increase (12 million dollars).
Historical Health fund deficit
We have a historical 32 million dollars health fund deficit inherited from former superintendents’ era, which has to be paid down over the years. With the plan worked out with the county government, we need to pay around 8 million dollars per year to pay it down. The original deficit was 50 million dollars.
Funding Category is Complicated
During the discussion, we heard the teacher salary (State Category 2) increase was fully funded. In reality, when there is an increase of salary, other expenses (benefits, retirement) will go up as well. We will not be able to give a teacher salary increase, but not give them the associated benefit increase. So unless everything associated with a full compensation package for an employee is fully funded, we could not call the salary increase fully funded.
Second, many teachers’ salaries are not funded in State Category 2. For example, there are more than 1200 special education teachers whose salaries are not funded in Category 2.
Third, the health care cost keeps increasing at a faster pace than anything else. In order to avoid the health fund deficit issue that happened before ( with an accumulated deficit of 32 million now), we need to fully fund the health care cost. The school system cannot run at a deficit by law.
It is a little complicated and I want to make it easier for the general public to understand it.
More Communication to the community
During the last two weeks of the budget discussion, we received thousands of emails asking the board not to cut the budget. In reality, the board is not generating money ourselves. We fully rely on the funding from the county and the state to operate. They give us money and we make a budget and balance the budget.
Furthermore, when the board was in negotiation with the unions, we were not allowed by law to discuss anything about employee salary and benefit publicly. We were not able to comment on the negotiations publicly. The public and our workforce definitely felt the frustration because of the communication restriction on these topics. We had to rely on the union leadership to relay the message back to union members.
Future Budget Process Improvement
For the school budget, if we don’t ask for it, we don’t get it from the county government and the county council. At the same time, we know the county has so much need and we will not get the full amount we ask. So we have a very delicate balance here since we want to present a fair and reasonable budget for discussion.
Furthermore, the county executive and the county council can claim they fully fund something by State Category. However, all categories are interconnected when our staff is preparing for the budget. In general, we are not able to separate one category totally from other categories while considering funding.
Realizing our funding will be short for the near future, I have been advocating for a change in the budget process to avoid the last minute change and uncertainty which is painful and hurts the morale of our workforce.
We could consider a budget into two parts.
The first (basic) part is the Maintenance of Effort (MOE) budget which the county and the state are bound legally to fund the school. At the MOE level, we can check to see:
whether the class size will increase or not,
whether our workforce will be surplused or not,
where the special education will be fully funded or not,
whether the health fund is fully funded or not,
whether the instruction materials are fully funded or not
The second part is the add-on above MOE part. Based on our need and priority, how much extra money we need to fully fund the school system.
whether/how we can decrease class-size.
whether /how we can add/change programs.
whether/how much we can give our teacher a salary increase.
Whether/how we can renovate school service without increasing budget
whether we can launch any new initiative to improve mental health service, further close the student achievement gap, and many others.
County Tax and HCPSS Budget
Many people are now realizing that HCPSS is facing a structural deficit issue. The funding increase could not catch up with the student population growth and other increasing needs.
In reality, the share of the county funding into HCPSS is swinging up and down. HCPSS budget was previously mismanaged and underfunded such that we are facing such a difficult situation now.
We hear there are people calling for higher tax. However, tax for our county residents is very high already. Our tax rate is top 3 in Maryland. Raising tax may have a detrimental effect on our economy and in the end it may hurt our tax base in the long run.
Furthermore, additional tax revenue does not mean it will be provided to HCPSS. I want to avoid the failed promise and fiasco that Maryland state gambling money would go into education when some people promoted the gambling industry. Yes, some gambling money went into education, but original money was diverted away.
The county may receive 20 million dollar additional revenue by increasing some tax rate, but the county may give only 1 or 2 millions to HCPSS. I have been advocating for HCPSS to receive a larger share (percentage) of the county revenue.
There are many “wants” in the county budget and we may need to shrink those “wants” and redirect the money to HCPSS. Our excellent school system is one of the most important reasons that many families come here and 90% of county revenue comes from property tax and income tax.
We need to cherish the support and trust from families who live here and HCPSS must provide an excellent, equitable and individualized education for our students.
I am glad that we now have a plan to eliminate the health fund deficit by 2024. HCPSS and the county government are working together to address this historical health fund deficit. We need execute this elimination plan truthfully. We need make sure we are not adding extra deficit into the current health fund each year. Here are two documents: one from the county executive and one from HCPSS.
Here is the plan to address HCPSS health fund deficit. The plan takes many years with the effort from the county government and HCPSS. We will discuss this plan with the county council next Monday.
Here is the letter from HoCo BOE to the county executive. HCPSS saved around 15 million dollars last year. The board wanted to ask the county approval to use this 15 million dollars to pay down the existing 39 million health fund deficit.
If HCPSS uses this 15 million dollars for FY 2021 recurring operating budget , HCPSS will have an ever growing deficit in 2022. First, the 39 million health fund deficit will not decrease. Second that 15 million dollars will become a deficit, or 27 million dollars if the 12 million dollars from FY 2019-2020 deficit is included again. Note in FY 2019-2002, HCPSS used a one time balance to fund the recurring budget. Now immediately coming into this FY 2021 budget cycle, we have an existing 12 million deficit already, on top of the 39 million health fund deficit.
This is exactly one of many reasons that we got 50 million dollars health fund deficit before, using one time fund to pay recurring cost. We should not repeat old mistakes again.
Our auditor Cohn Reznick has informed HCPSS that HCPSS CAFR will likely include a “GAAP” departure, which includes a qualified or adverse opinion. This change may impact our county’s AAA bond rating, which means the county may borrow less with higher interest rate in the future.
So HCPSS will work with the county executive and the county council to create a concrete, workable plan to reduce the health fund deficit and avoid another adverse opinion next year. Three parties should be on the same boat for this crisis we are facing now. Otherwise, this will tirgger down and impact many people.
The reason for this adverse opinion is that HCPSS was not able to reduce health fund deficit. Health care claim for FY 2019 were 10.2 million over the budgeted amount of 130.6 millions. Even after some internal fund transfer, the deficit grew from 37 million to 39.2 million. During the FY 2020 budget cycle, a one time 12 million dollars, that was planned and supposed to be used to reduce the heath fund deficit, was used for FY 2020 operating cost such that the auditor failed to see HCPSS to have a plan and execute the plan.
Attached please see the memo BOE audit committee discussed with our auditor.