APS Pension Fund Task Force meets today at 12 p.m. [Udated]

March 10, 2014

The Atlanta Public School Pension Fund Task Force will meet for the first time today at 12 p.m. [time corrected]. The Task Force is led by Co-Chairs Jason Esteves and Nancy Meister. The objective of the Task Force is to make recommendations to the Board regarding the resolution of the approximately $530 million unfunded pension liability in the City General Employees’ Pension Plan .

As background, the unfunded pension liability in the City General Employees’ Pension Plan goes back decades due to the underfunding by prior Boards. However, the significant underfunding became more prominent when back in the 1970’s when the teachers in City Plan moved to the Teacher Retirement System (TRS). TRS required that the transfer of the teachers to their system be “fully funded”. As a result, a substantial amount of the pension assets were transferred to TRS and, at that point, APS’s share of the City Pension Plan was woefully underfunded. Since at least 2002, APS has made payments ranging from $39-46 million on an annual basis and the annual required payments will escalate significantly over the next several years.

The pension liability payments are currently coming out of the General Fund and the annual payment represent 7-8% of total General Fund spending. The current annual payments are approximately $1,000 per student and the payment amounts could go as high as approximately $1,600 per student in future years. As such, these amounts cannot be spent for educational purposes.

In the past couple of years, the payments have resulted in some controversy as to who is responsible for sharing in the payments. The administration has contended that the charter schools must bear their share of this expenditure that arose many years before the charter schools came into existence. The charter schools argued that the methodology being used by the administration to calculate the charter schools share of “local revenues” was not in accordance with State law and that they should not bear any of the cost of the underfunded pension. The GA Supreme Court has agreed with the charter schools (see here).

This is a tough issue and impacts the core mission of APS as it reduces the amount of funds available to educate students. And unfortunately, due to the irresponsibility of prior Boards (going all the way back for decades) the problem has never been resolved. Further, the problem APS is facing now is the same pension liability underfunding that many local and state governments are facing across the country – and that has resulted in several local governmental units going into bankruptcy.

In addition, this issue is similar to the one Mayor Franklin had to address regarding the city’s decimated outdated water and sewer infrastructure several years ago. In that case, under Court consent decrees, the city had to incur over $3.9 billion in costs to correct the problem and the water and sewer rates for current residents skyrocketed to pay for past mismanagement by prior city officials (see here)

I applaud the Board for taking on this issue and look forward to moving to a resolution that results in funding being restored to the education of the current students in the system.

Note – I will be serving on the Task Force as an outside member and therefore I will have a conflict of interest in reporting further on this Task Force’s activities. As such, I will only post on this Task Force’s activities with the express approval of both of the Co-Chairs of the Task Force.

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APS Audit Committee meets – raises WERE given to administrators in FY13 and an additional $500 million pension underfunding disclosed

March 5, 2014

The Audit Committee of the Atlanta Public Schools held its first meeting yesterday and it was disclosed that the external auditors had found that 5-7 administrators had received approximately $42,000 in raises for which the administration did not follow state regulations. This information is in direct contradiction to statements made by senior administration officials during last year’s budget discussion (see more on this below).

In addition, the external auditors noted that the Teachers Retirement System (TRS) was underfunded and APS’s share of the underfunding could amount to as much as $500 million. This amount is added to the approximately $530 million that represents APS’s share of the underfunded City Pension Plan. The combined total of over $1 billion for both pension plans is a startling number and doubles the previously disclosed underfunding problem.

In its initial session the Audit Committee (composed of Byron Amos, Steven Lee and Matt Westmoreland), on a motion by Westmoreland, unanimously elected Amos as the Chairman. The Audit Committee is tasked with oversight for the Office of Internal Compliance (Internal Audit) who is responsible for both internal and external audits.

The Committee heard presentations from the external auditor – Mauldin & Jenkins – that has conducted the audit for the last six years and from the State Auditors. A number of key issues were raised during the meeting, as follows:

  • The external audit report, which is part of the Comprehensive Annual Financial Report (CAFR) and can be seen here, resulted in a “clean” opinion which is the best that can be obtained. The auditors stated that, since the start of their engagement with APS six years ago, there has been a dramatic improvement in the financial and internal control systems at APS.  In fact, they were very complimentary of the work performed by CFO Burbridge’s team.
  • The external auditors had not found any material weaknesses in the financial system, but they did make two recommendations on certain procedural weaknesses.
  • The key weakness they noted was that their testing had shown that 5-7 administrative employees had received approximately $42,000 in raises in FY13 and the procedures followed by the administration in granting of these raises had not conformed to state regulations. Under state regulations, during periods when teachers are being furloughed, any raise granted to an administrator must first be publicly disclosed and a public meeting must be held. This was not done.

Comment – I raised the issue of administrators receiving raises last year (both directly and by reorganizing departments) and senior administration officials repeatedly denied this was the case (see here and here). An excerpt of one of the posts is as follows:

 Again, under very pointed and direct questioning, both Associate Superintendent Steve Smith and Deputy Superintendent for Curriculum and Instruction Karen Walden stated unequivocally that no central or school administrative staff had received any raises during the past year or were there any raises for these staff members in the upcoming Budget. However, they did say that certain individuals did receive salary increases as a result of being promoted to new positions. Several Board members remained skeptical and requested additional information related to the numerous Departmental reorganizations, changes in positions titles and apparent compensation increases shown in the Preliminary Budget. I think this one is going to get very interesting given the strong and unequivocal denial that any salary increases had been given out.

It appears that the administrations statements were, at best, incorrect.

  • The external auditors noted that under new GASB guidance the estimated pension liabilities in the future would be presented on the balance sheet versus as footnote disclosures in the past. As a result, the unfunded pension liabilities – currently estimated at over $1 billion – would be included as part of the balance sheet in FY15. It was during this discussion that APS’s share of the TRS underfunding amounted to approximately $500 million.
  • State auditors also made a presentation on their review of APS finances and controls. They indicated that, given the tremendous improvement in the financial systems and controls at APS over the last five years, they were able to heavily rely on the work completed by the external auditors and did not find any misstatements or required adjustments.
  • The state auditors commended the APS finance organization and presented them with an Award of Distinction for Excellent Financial Reporting. This award was only granted to 24 out of 252 entities. The state auditors also noted that the 10 year financial and statistical information that APS includes in the CAFR also represented an excellent achievement that only 12 of the 252 entities in GA provide to their constituents.

Comment – During my interactions with the Finance team at APS, I have always been impressed with their knowledge and their promptness with responses to my many questions. The award noted above is well deserved and it was clear CFO Burbridge was proud of his team. Nice job!

In addition, a number of other Board Committees have met over the last several weeks. I will report on their activities in subsequent posts.

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GA Supreme Court affirms lower court ruling – charter schools win back $2.8 million in funds withheld by the Atlanta Public Schools [Updated]

September 23, 2013

In a unanimous decision, the Georgia Supreme Court affirmed the lower court ruling that was in favor of the charter schools and against the Atlanta Public Schools in regards to how charter schools in Atlanta are funded. Based on the ruling, APS improperly withheld $2.8 million from the charter schools.

The lower court ruled last December (link) that the GA statutes, which govern the methodology for allocating “local revenues” to charter schools, do not allow the Atlanta Public Schools to charge the charter schools for a share of the over $550 million “unfunded pension liability”.

In its ruling (see here), the Supreme Court agreed with the lower court’s reasoning and stated,

…we agree with the trial court that pursuant to the plain language of § 20-2-2068.1 (c), appellants are without authority or discretion to deduct the unfunded pension expense from their calculation of local revenue to be distributed to start-up charter schools.

… [the Atlanta Public School’s] subtraction of funds from the calculation of local revenue to cover a portion of APS’s unfunded pension liability circumvents the plain language of § 20-2-2068.1 (c) and deprives the start-up charter schools of funding to which they are legally entitled, we affirm the trial court’s order…  

…The proper remedy for appellants’ opposition to the language of the local revenue funding formula as written lies within the General Assembly.

[Added] Maureen Downy at AJC’s Get Schooled blog provides additional information and analysis here. AJC’s Mark Niesse reports on the story here.

Last year, APS informed the charter schools that the methodology for allocating “local revenues”, which is mandated under GA statutes, would be adjusted and the charter schools would have to share in paying for the over $550 million unfunded pension liability. The unfunded pension liability was incurred in the 1970’s. The APS charter schools sued APS and the initial hearing was heard by Judge Wendy Shoob in the Fulton County Superior Court. Judge Shoob ruled that the methodology used by APS was not consistent with the GA Statutes. APS, with the full support of the Board of Education appealed to the Supreme Court. For more background on the case, see here.

The East Atlanta Patch previously reported the following is the amount withheld per charter school (link):

  • Atlanta Neighborhood Charter School: $405,296
  • Atlanta Preparatory Academy: $291,068
  • Drew Charter: $578,514
  • Intown Academy: $190,063
  • Kipp: $785,724 (includes Kipp Strive, Kipp Ways and Kipp Vision)
  • Kindezi: $116,598
  • Latin Academy: $51,030
  • Wesley International Academy: $398,492

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GA Supreme Court to announce decision on APS charter school funding case this coming Monday

September 20, 2013

Per Mark Niesse at the AJC (link), the Georgia Supreme Court will announce its decision Monday on the funding dispute between the Atlanta Public Schools and the charter schools in the District.

As background, last year APS withheld approximately $2.8 million from the charter schools and claimed that the APS charters schools would have to participate in the funding of the over $550 million pension liability that APS incurred over two decades ago. The charter schools sued APS on the basis that the funding provisions, as stated in the GA statutes, do not provide for any mechanism that would allow APS to withhold the funds. In December 2012, Judge Wendy Shoob of the Fulton County Superior Court ruled in favor of the charter schools. APS, with the full approval of the Board of Education appealed the decision to the Supreme Court.

For more background information and details, follow the links below for each topic.

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Summary of Atlanta Public Schools Board of Education Meeting – August 12, 2013

August 13, 2013

The following is a summary of the key items considered and the decisions made at the Atlanta Public Schools Board of Education meeting held yesterday. For a more detailed transcript of the meeting, see Talk-Up APS here. In addition, newspaper articles on key topics are linked below.

Atlanta Classical Academy (ACA) – The ACA charter petition was approved unanimously over the negative recommendation of Superintendent Davis. Both the Superintendent and the BOE recognized that the issue of the unfunded pension was a problem that must be dealt with. However, in general, the BOE did not believe it was appropriate to deny the ACA charter petition on those grounds. See more by Mark Niesse at the AJC here.

Pension Plan Liability – As part of the discussion on ACA, Superintendent Davis indicated that the administration was considering a number of alternatives on how to deal with the over $500 million pension liability. This included the potential for issuing a bond to cover the underfunded amount or potential legislative changes. All agreed that the issue must be resolved in the near future.

Cost of Charter Conversion Versus Charter Start-Up – There was a brief discussion on the difference between the costs of funding a charter conversion versus a start-up charter. This was brought up as both Toomer and Centennial Place elementary schools are being considered for conversion charters in October. The administration argued that it costs APS less to grant a conversion charter versus a start-up charter. [Comment – the argument that this is the case was not convincing.]

Hind Feet Montessori Charter Petition – The Hinds Feet Montessori charter petition was deferred to the next meeting at the request of the filer.

FYU13 Financial Forecast – The final financial forecast for FY13 indicates that the General Fund balance will be $85.2 million, an increase of $4.3 million over the FY12 balance. Revenues will come in at $577.6 million, $21.8 million over the FY13 budget and expenditures will be $573.3 million, $6.4 million higher than the FY13 original budget. See slide presentation here.

Success of First Day Activities – Both the administration and the BOE considered the implementation of the first day of school planning to have been a success. The key was the registration of an additional 5,000 students prior to the first day as compared to last year. Additionally, a command center was established to quickly address issues as they arose. See slide presentation here.

Open Teacher Positions – A total of 298 teachers were hired and there are still 94 teaching positions to be filled. The breakdown between the school levels was not available.

Mold Issues – Mold issues at DH Stanton and Washington High School were discussed. The BOE authorized the development of a plan to remediate the problems quickly. The administration noted that the problems are due to the excessive rain, however, in certain cases there are underlying structural problems that may have to be dealt with.

Payroll Department Restructuring – The BOE approved the abolishment of six payroll position and the creation of five new ones. [Comment – a clear answer as to why the change is cost neutral was not given.]

Transfer of General Funds to Lottery Fund – The BOE approved a $300 thousand transfer of General Funds to the Pre-K Lottery Fund. In the last two years, while the funding for this program has come down, the services provided by APS has remained the same. In FY12, certain expenses were transferred to the General Fund. For FY13, the negative fund balance is being replenished with the approved fund transfer. CFO Burbridge indicated that a similar occurrence should not happen in FY14.

Selection of Superintendent Search Firm – The BOE selected Atlanta-based BoardWalk Consulting and Philadelphia-based Diversified Search to handle the search for the new superintendent. See more by Mark Niesse at the AJC here. [Comment – Korn/Ferry International was also interviewed to conduct the search.]

Additionally, it appeared to me that many more questions were asked by the BOE as each item was brought up for consideration. As readers of this blog know, I listed a number of questions (here) that I thought should be answered in advance of the BOE meeting. Many, but not all, were addressed. It is a step in the right direction.

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APS – The Charter Schools Funding Court Case – A Possible Compromise

May 7, 2013

Yesterday I wrote about APS’s arguments presented in the hearing regarding the method used to get the Charter Schools to participate in the funding of the pension liability. The following is my sense of what their concerns are:

  1. The pension liability is going to continue to grow and eventually it will have a significant impact on funding for direct APS students.
  2. If property taxes have to be raised to pay the pension liability, Charter Schools would receive a “windfall” as the incremental “local revenues” would have to be shared with them.
  3. Unless a resolution is reached, APS will discontinue the approval of additional Charters and possibly not renew existing Charters.

I have also talked to many individuals in the Charter School community and most are saying that they are willing to participate in a “solution” but, they cannot withstand the current reductions in funding.

So, is there a way to address APS’s concerns and include the Charter Schools in a solution that everyone can accept? The following is a modest proposal for a compromise on the issue:

  1. The Charter Schools would continue to get the level of funding called for under the statutory guidelines with certain potential modifications in the future.
  2. APS would continue to pay the pension liability consistent with it historically doing so.
  3. In the event that the Board of Education determined that a tax increase was needed to specifically deal with the pension liability in the future, the Charter Schools would agree to waive their right to their share of the tax increase, with the following conditions:
    1. The amount of incremental taxes that the Charter Schools would waive their right to is no greater than:
      1. The future required pension plan payment as calculated by the Plan actuaries.
      2. Less: the amount of current pension plan payments (adjusted upwards for inflation). In other words, Charter Schools do not receive a “windfall”.
      3. Less: the amounts due for current active plan participants (costs that clearly only benefit APS).
      4. Any amounts received in tax increases greater than the amount calculated above would be shared with Charters under the standard formula.
  4. APS would commit to sharing certain amounts of SPLOST revenues with the Charter Schools – this would not have to be a full pro-rata amount, but a reasonable formula could be devised for approved projects. The amounts so allocated would then become restricted for Charter School use currently or in the future.

This solution may not be perfect, but it addresses the major concerns of the APS Administration, provides a mechanism in which taxes could be raised if needed, takes the “windfall” out of the equation, allows the Charter Schools to willingly share in the pension costs and in return provides the Charter Schools with a potential new source of revenue for building and renovation costs.

Remember, a “deal” is generally not complete until both sides are angry and believe that they have given up too much. Release the dogs of war in the comments!

APS – Administration’s Position on the Unfunded Pension Liability – As Stated in Court

May 6, 2013

I have reviewed the transcript of the hearing held last December on the method used by APS to reduce “local revenues” by the amount of the unfunded pension liability which resulted in a $2.8 million lower payment to Charter Schools for FY13. The Judge has ruled that the methodology used by APS was not consistent with the GA Statutes, however the case has been appealed by APS and so the funds continue to be withheld.

The following is some background on how the issue arose:

  1. The problems started back in the 70’s or 80’s when the teachers in the Atlanta City General Employees Pension Plan moved to the Teacher Retirement System (TRS).
  2. TRS required that the transfer of the teachers to their system be “fully funded”. As a result, a substantial amount of the pension assets were transferred to TRS and, at that point, APS’s share of the City Pension Plan was woefully underfunded.
  3. Since at least 2002, APS has made payments ranging from $39-46 million on an annual basis.
  4. The total unfunded pension amounts to approximately $532 million and APS has scheduled payments over the next 14 years ranging from $44 million in the early years to $80 million in 2027.

In a word, it’s a mess left over from the failure of prior Board’s of Education to fix the problem when it arose. Accordingly, since the problem was detected, APS benefited by spending more than it otherwise would have if the proper amounts had been allocated to the unfunded pension from the beginning.

It is instructive to look at the arguments posed by APS in support of their methodology as it presents their major concerns regarding available resources for direct APS students now and in the future. In summary, the arguments (with my comments in parenthesis and bold) are as follows:

  1. Everyone in the entire system (including Charter Schools) benefits from paying the amounts due. (Comment – The benefits cited by CFO Burbridge are not “direct benefits” but general benefits related to “reputational” and “adhering to Generally Accepted Accounting Principles”. In essence, a clear admission that Charter Schools did not “benefit” due to the underfunding. However, as noted above, APS clearly did benefit from the prior underfunding.)
  2. As the cost of paying the unfunded pension increases, the impact on direct APS students will increase and there will be a growing disparity between the funding of Charter School and direct APS students. (Comment – this argument was essentially demolished by the Charter School counsel who pointed out that there is already a substantial “disparity” in funding due to SPLOST revenues and Federal revenues that are not shared with the Charter Schools.)
  3. If local taxes have to be increased to cover the cost of the unfunded pension, then Charter Schools will get a “windfall” as they will share in the increased tax revenues. (Comment – theoretically this would be true, but the assessment is based on several assumptions that were not specifically identified in the argument such as: (a) the tax base used in the argument remained static and there was no provision for an increase in property values over the next 14 years; (b) as the increase in property value was not considered, the assumption that property taxes would have to be raised in the future that result in a “windfall” for Charter Schools is unfounded; and (c) the total unfunded liability ($532 million) continues to be discussed even though the number is very outdated (actuarial valuation dates back to July 2011) and does not consider the pension plans investment performance for the last two years.)
  4. The funding “windfall” to the Charter Schools is an “absurd result” that was not intended by the Legislature when the Charter School funding formula was developed. (Comment – this is probably true, just as the Legislature probably did not consider that fiscally irresponsible Boards of Education would not pay for their liabilities as incurred and engage in “generational theft”.)
  5. The reduction in Charter School funding was “transparent” and could otherwise be accomplished by a direct expenditure charge to the Charter Schools similar to the charge for certain APS data processing capabilities the Charter Schools use. (Comment – I do not see how this line of reasoning holds up. I believe the Charter Schools have agreed to certain charges as they gain a benefit for doing so, but my sense is that it would be a difficult case to prove that the pension liability expenditure could be charged without their consent.)
  6. If 100% of the school system converted to Charter Schools, there would be no funding available to pay for the unfunded pension liability. (Comment – this is a strawman argument, but let’s assume that this were the case. If so, taxpayers would no longer have to fund a substantial portion of $49 million in APS School Administration, $77 million in APS Operations and Transportation and $46 million in APS General Administration. Give me that choice as a taxpayer and I guarantee you we will find a way to fund the pension liability.)
  7. If APS cannot use its methodology for allocating “local revenues”, Mr. Burbridge would strongly recommend against approving any new Charter Schools or renewing any existing Charters. (Comment – the Judge specifically asked if this “was a threat?” APS counsel said no, but I do not see how it could be construed as anything else.)
  8. Comment – while not noted in the hearing, the amount of annual unfunded pension liability is composed of two items – the cost for active employees (approximately 800 who are working to the direct benefit of APS) and the cost related to prior years underfunding.

As you can see, the whole situation is a mess and the end result is less funding for the school system. Is there a compromise solution that deals with the issues raised by APS and that still allows the Charter Schools to be fully funded in the near term? I think so, and will provide a suggestion in a future post.

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