APS Budget Process & Financial Monitoring – Some Recommendations

August 3, 2013

This past year the budget process was a problem. The information was published at least 45 days late, often information requests were delayed, financial data was provided in “bulk” with limited summaries, no written explanations were provided for changes in spending and the administration never provided a clear set of priorities and objectives that justified the spending requested.

Often the Budget Commission was frustrated with the process and the final budget passed for FY14 was simply passed because time had run out. In fact, the Chair of the Budget Commission and the two BOE members that were the most active in during the budget process voted against the final FY14 budget. My sense is that even those BOE members that did vote to pass the budget were not entirely satisfied with the process.

There are a number of steps the BOE can take now to improve the process for next year. However, this would require some changes to the budget policy that guides the process and subsequent monitoring of revenues and expenditures.

The following are a series of recommendations that the BOE could implement immediately to avoid a similar problem next year.

Revise the Budget Policy to Include More Detail – In April 2012, the budget policy was modified and deleted detailed information from the required administration presentations. As the policy reads now, the BOE approves the budget at the fund level only. This change resulted in the initial presentations to the Budget Commission being composed of a single slide with only total revenues and total spending presented. Detailed information on spending by category or program was not presented until very late in the process.

Recommendation – The budget policy should be reverted to its prior form and additionally modified to require additional summary information for the programs presented.

Require Complete and Comprehensive Budget Information – the BOE is responsible for approving all the Funds – General, Special Revenue, Debt Service and Capital Improvements. To properly assess the level of resources available and the expenditures requested, the BOE must be able to see the information for the organization as a whole.

In addition, the presentation to the Budget Commission should include the detailed budget for all funds – not just the General Fund and the proposed staffing should be presented at the same time (FTE staffing must be shown in each fund in which salaries are being paid). This past year there was an extensive level of expenditure transfers between funds, but it was impossible to keep up with as the Special Revenues and staffing budgets were not presented until late in the process.

Recommendation – No later than the end of April, the detailed information for all Funds and staffing information should be presented by the administration to the Budget Commission. 

Require Timely Budget Information – the initial budget is scheduled to be released in April. However, this past year the budget information was not released until May. The BOE needs to insist that a comprehensive budget package be presented at a summary level in early April and at a detailed level no later than May 1st. Otherwise, the Commission is unable to properly address the issues that arise during budget discussions and to then make their decisions on policy alternatives.

Recommendation – the Budget Commission must require that the administration present an initial summary budget for all funds in April, followed by a detailed presentation no later than May 1st for the General, Debt Service, Special Revenue and Capital Improvements Funds.

BOE Should Establish the Maximum Class Size and the “65% Test” in Advance of the Budget Preparation – this was a contentious issue during this past budget season and focused the budget discussion away from many other policy alternatives that deserved attention. The maximum class size waiver is one the most important points of leverage that the BOE has. In addition, the GA DOE requires that 65% of spending be in the classroom. These two items establish the initial allocation of resources between Classroom Instruction expenditures and spending on everything else.

Recommendation – the BOE needs to establish the maximum class size waiver it is willing to accept and the targeted percentage of resources that will be directed toward the classroom no later than January/February 2014. This will provide the administration the necessary  guidance needed to prepare the initial budget. 

Require that the Initial Budget be Balanced and Not Rely on Use of Reserves – The current budget process is upside down and backwards. The administration presents its wish list (which always results in a significant deficit) and then the budget discussions focus on how to close the proposed deficit. Instead, the administration should present a balanced budget – or even better – a budget with a surplus. Then the administration can propose and justify additional spending based on the organizations priorities and objectives. The BOE can then consider these additional requests in the context of the priorities and policies the BOE has adopted.

Recommendation – the initial budget presented by the administration must be balanced and not use any General Fund reserves. The BOE should also consider requesting that the initial budget presentation by the administration have a 5-8% surplus and then provide the administration an opportunity to request additional spending to meet specific objectives. The BOE can then make an assessment of the additional expenditure requests and determine if and how they will be funded (deficit spending or raising property taxes).

Establish an Ongoing Quarterly Monitoring Process – as it stands now, the budget information is presented in a specific format. However, the financial information provided to the BOE on a monthly basis is in an entirely different format and at a highly summarized level making it virtually impossible to determine if the budgeted priorities are being carried out by the administration or how actual spending is reallocated between functions and departments.

Further, the difference between the actual spending at a departmental or division level versus the budgeted expenditures is not fully known until the Comprehensive Audit and Financial Report is issued in December – a full six months after the fiscal year is over.

The BOE needs to have a process in place to monitor ongoing spending at a reasonably detailed level and that is compared to budgeted spending to ensure the changing expenditures decisions made by the administration conform to the policy decisions made by the BOE.

Recommendation – on a quarterly basis the Budget Commission should review the actual versus the budgeted spending in the same format and at the same level of detail as originally approved during the budget process. The information presented should include a forecast for the full year in comparison to the annual budget. Also, the BOE should establish budget variance dollar and percentage thresholds that, if exceeded, would require a written explanation for the variance from the administration.

Gain Confidence in the Budget and Other Financial Information Presented – the Budget Commission spent a great deal of time this past year questioning the accuracy and completeness of the financial information provided by the administration and the administration continually had to revise and correct errors in the data presented. By the end of the budget process, it was clear that the Commission had lost trust in the administration’s willingness to provide complete and accurate information to guide the BOE’s decisions.

In addition, as I have noted here in the past, the administration provides an extensive amount of financial “data”, but provides little in terms of easily useful and summarized information. The problem is further compounded as most – if not all – of the BOE members do not have extensive financial backgrounds which they can rely on to interpret and assess complex financial information.

While the administration should be responsible for presenting financial information that is accurate and can be digested by non-financial BOE members, it simply does not and the BOE’s skepticism with the information presented is well founded. In addition, when the BOE questions the administration on financial matters, the answers are often so full of bureaucratic and financial terms that the answers are nearly incomprehensible to non-financial BOE members.

Recommendation – the Budget Commission should consider appointing a small group of financial experts who are familiar with the budgeting and accounting process to assist them in evaluating the completeness and accuracy of the information provided by the administration. This group would be prohibited from making any policy recommendations – that is the purview of the BOE. However, this group would give the BOE additional comfort that the information they receive is accurate and complete. In addition, it would provide the BOE an expert resource to assist them in evaluating the administration’s answers to complex financial questions. (Note – the full credit for this idea goes to Jarod Apperson who suggested this several months ago.)

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APS – A Word on Preparing Budgets

June 18, 2013

Over the course of the last 30 years, I have prepared static and variable budgets on an annual basis and on a rolling 12 month basis. The process is actually quite simple, but it can take a significant amount of effort to get it right in the first place. There is a simple key to doing so – that is to focus on getting the salaries and a couple of other major components “right” and the rest of the budget becomes additional noise.

Salaries generally represent 55-65% of the budget. When you add the Employee Benefits piece (which is a direct function of salaries – in the case of APS approximately 28-30% of salaries) you have accounted for 75-80% of costs included in the budget. If you get this part “right”, the rest tends to be a function of what was spent the year before – especially with major contracts that are in place for multiple years.

So what does this mean? If the budget overstates Salaries by even 3%, with a $600 million budget, the error can amount to $18 $10 million – which for APS represents a substantial portion of the deficit projected for FY14. Please note that I am not saying this is the case, simply saying that a substantial amount of the time devoted to preparing a budget MUST be spent on getting the Salary line item right the first time.

In addition, CFO’s tend to be financially conservative and know that “things happen” during the year and it is a wise policy to insert reasonable “budget cushions” to provide for the unexpected events that always occur. We tend to be sneaky with these “cushions” so that they are hidden and available when needed (as they always are). However, except for very minor “cushions” for expected raises, promotions, etc., the Salary line item is not the place to do this as it gets too much scrutiny. And unfortunately for financial officers, once a “cushion” is found it often gets taken away and reallocated to other purposes. However, there are great places to hide “cushions” –  but that is a trade secret that non-CFO’s will have to figure out on their own!

All that being said, when reviewing an expense budget, it makes sense to spend the most amount of time on the Salary line – understand that and you are 75-80% of the way to making a reasoned judgment on the integrity of the numbers presented.

And that is the process I am going through now – deliberate, detailed and thorough – it is the only way.

Open Letter to the Atlanta Public Schools Board of Education, Budget Commission and Administration

June 5, 2013

It is my intent to deliver the following message to the Board and Administration at the Budget Commission Meeting today at 3 PM.

Good afternoon. My name is Robert Stockwell and occasionally I write about APS finances on my Financial Deconstruction Blog. As background, I have spent over 30 years as a Chief Financial Officer or Chief Operating Officer for complex multinational private and public companies. We have lived in Atlanta for 17 years and one of my children attended Jackson Elementary. Both my wife and I attended great public schools. We both strongly believe in the value of education and – between the two of us – have 21 years of post-high school education. Our public educations have served us well and we want the same for the next generation.

I wanted to speak to you today because I am deeply concerned with the trends I am seeing. And quite frankly, my sense is that this Administration is tired and out of ideas. In the current budget I don’t see any new initiatives – either on the education front or on the cost efficiency side. Just as importantly, I am not hearing any answers to reasonable questions or concerns raised by members of this Commission or by parents. What I do hear is excuses or, quite frankly, whining about why it can’t be done.

Over the course of the last two months, on any number of occasions, I have heard that the tools or the systems or the controls needed to move the organization forward are not in place. However, during the last five years, this organization has spent $155 million on Information Technology – but we still hear the same refrain. Our systems don’t talk to each other and we don’t have the necessary controls in place. At the same time, we do not hear of any plans to fix it or find ways to work around it. Superintendent Davis – you are charged with a mandate to put people in place that can accomplish what the organization requires. However, by your very own words, that has not happened and the excuses are beginning to fall on deaf ears.

But I think there is something we can agree on – the primary mandate of this organization is to educate our children. At least that is what I hear during these meetings. However, the budget and the spending priorities of this organization tell a very different story. Out of every dollar spent, 44 cents are spent on things other than in the classroom – and the percent spent directly on teaching our children has not improved over the last three years. And no matter how often you say that 81% of the resources are in the “School House”, the fact of the matter is that only 56% is spent where it matters – in the classroom.

Quite frankly, I am amazed at where we are on this budget after hearing the impassioned pleas from parents asking for help on the “class size issue”. But no real changes or redirection of resources seem to be forthcoming. Worse, when the Deputy Superintendent for Instruction was specifically asked what amount of money would make a difference? She had no answer. Is it $2 million, $5 million or more? No answer. However, she was quite clear that the spending on the School Administration function was “very tight”. So our Deputy Superintendent who has responsibility for carrying out the most important mandate of the system has a very firm opinion on how much should be spent on administrators – but no opinion on how much it takes to drive  educational success in the classroom. That is very troubling.

And now to the budget process. We are nearly at the end and I assume the budget will be passed because the deadline is looming. However, the process has been a mess! Information has been late by at least 30 days or more. Critical data trickles out and has to be revised numerous times. Often the data is questioned and the Administration admits that there are errors. Legitimate questions have been asked repeatedly by this Commission – and repeatedly the answers are slow in coming or are not provided at all. We are asked to form an opinion on resource allocations, but we only have access to 2/3 of the budget – Special Revenues have never been released. We have been told that no raises have been given to the administrative functions, but the budget data says otherwise. And when this is pointed out, the answer is “no conspiracy here” – please move along. Too often the answer is “trust me – we will take care of it”, but trust is earned with solid data, credible information and, ultimately – performance. But none of these are forthcoming from this Administration.

As I said at the beginning, this Administration seems tired and out of answers and solutions. But the children who must be educated are still there – they can’t wait. It is time to do something bold as it clear that the resource allocations to-date have not worked. I urge you to be bold and begin on a path that includes a dramatic change. You can start by reallocating resources to Direct Instruction and lower the requested “class size waiver” to no more than three – and then commit to bringing it down to zero over the next three years. Will it be difficult? Yes. Does it require tough decisions? Yes. Can it be done? The answer is a resounding YES!

We must start placing the resources where they can make a difference. Remember – teachers teach our children – not administrators. It is time to get our priorities right.

Thank you for your time and consideration.

Update: This letter was published in its entirety at the AJC Get Schooled blog and the following Patch sites – Buckhead Patch, East Atlanta Patch, Midtown Patch and the Virginia Highlands-Druid Hills Patch. Thanks for the links!

APS – Operating Units of the APS Organization – My Take

May 24, 2013

A recent post may have confused some readers regarding the difference between the School Administration components and the General Administration. To try to clarify, I break the APS organization into three major operating units. In addition, each of the major operating units has several sub-units that make sense to group together. The following is how I break the organization down:

  1. Curriculum and Instruction – the primary function of the school system
    1. Direct Instruction – primarily teachers and para-professionals.
    2. Student Services – activities in the schools to support students (social workers, guidance counselors, etc.)
    3. School Administration – primarily individuals working in the schools and with direct daily contact with teachers (Principal’s, Assistant Principals, Registrars, School Secretaries, etc.)
    4. Central Office School Administration – various Departments that serve purely in administrative functions in support of the School Administration noted above. As a general rule, these individuals are located at the central office and not in the schoolhouse.
  2. Operations – provide for maintenance, custodial services, transportation and security.
    1. Operations Administration – the management and planning function for all Operations
    2. Facilities – departments that maintain the physical plant.
    3. Custodial Services – custodians, both in and out-sourced
    4. Transportation – school bus services
    5. Safety and Security – police services, security guards and cross-walk guards
  3. General Administration – centralized general and administrative functions
    1. Board of Education
    2. Superintendent and Assistant Superintendent
    3. Chief Financial Officer
    4. Human Resources
    5. General Counsel
    6. Information Technology

Hope this help clear things up.

The Most Important People

June 20, 2012

Today at the AJC blog – Get Schooled by Maureen Downey – is an open letter from Professor David Dudley to everyone at  Georgia Southern University. It addresses many issues, but I was struck by the following part excerpted below. As they say, read the whole thing. 

“The Most Important People at Georgia Southern . . .

are not its president, nor its provost. Nor its other vice-presidents, deans, department chairs, advisors, staff members, or faculty members. The most important people here are our students, and when we forget that, we might as well turn off the lights, lock the doors, and go home.

The most important person on our campus is the young woman from a small southeast Georgia town who will enter here as a freshman in August. She will be nervous but excited. She might not know what she wants to study, but will find her interest sparked in a biology course, or a sociology class, or in a philosophy class. A certain professor will ask a certain question, present a certain problem, discuss a certain topic that this student has never heard of or thought of before. And then her education begins.

The most important person on our campus is the young man from Atlanta who could have gone to UGA but chose us because he was impressed by our personal regard for him as a student and as a person. He already knows he wants to study business, but he, too, will be surprised at how his intellectual field is enlarged by what he hears in an American history class, or in a geology lab, or at a construction site.

These young kids are more important than we are. That’s what we’ve told the world through our choice to help educate them, prepare them for the challenges of citizenship that lie ahead. We are here because we’ve chosen to serve them.”

He raises the level well beyond “priorities” – and brings to mind a true sense of “mission”.  Well done Professor!

More on APS Constituencies, Their Priorities and Their Responsibilities [Updated]

June 12, 2012

Earlier I wrote a post regarding the factors that needed consideration in making the Drew Charter High School decision. As part of that post, I considered it necessary to establish who the Board of Directors and the Superintendents constituents were and the prioritization of these groups in the decision making process. I strongly believe that a thorough understanding of who is in each group, what each groups responsibilities are, what priority each group has in the hierarchy and how each group will be impacted by a decision is critical to a decision process that is fully in the best interests of the constituent groups and the APS system as a whole. To that end, I want to expand a bit on this part of my prior post.

The Consumers – the system is in business to meet their requirements

  1. Students – the education of the students is the primary mission of the school system and therefore the students are the highest priority and stand at the top of the hierarchy. The benefit to the students must be the first consideration in any decision made. Additionally, the student body must be considered as whole, as relevant sub-groups and as individuals – a balancing act that is often difficult to achieve. However, when positive decisions can be made that benefit a some students or sub-groups with only a minor impact on the rest of the student body, the action should be taken and all efforts made to mitigate the minor impacts to other students.  In return for placing the students at the top of the hierarchy, they have a responsibility to perform on their end of the social contract which includes attending school, respecting their teachers and putting in a reasonable effort to learn. If they comply with their end of the bargain, then they earn their top place – if not, the consequences should be immediate and severe.
  2. Parents – the parents of the students have the highest vested interest in the education their children receive. Study after study has shown that the more involved the parents are in their children’s education the better are the educational outcomes. All efforts to capture their passion and their involvement must be made (within fiscally reasonable boundaries). At the same time, parents often want to protect their children from minor dislocations (changing schools, redistricting, etc.). While this is admirable and their concerns must be addressed, minor dislocations or disruptions to parents and students resulting from reorganizations of schools or districts should not be high on the priority list or a major influence on decisions that are necessary to maintain an efficiently operating school system. Additionally, the parents have the primarily responsibility for enforcing the social contract the students have with the schools. Parents that are not involved with the schools or with their children’s education and conduct lose their right to such a high position in the hierarchy.

The Front Line Troops – they must deliver on the promise to the consumers

  1. Teachers, Paraprofessionals, Media Specialist and Guidance Counselors – The importance of this group cannot be understated and they are critical to the success of the students as they interact with them on a daily basis. Having a highly capable, competent and motivated team of teachers, paraprofessionals, media specialists and guidance counselors is absolutely essential if the school system is to deliver on its mission. As part of the social contract, we entrust them with the responsibility of motivating and educating the students. Their views and opinions on improving student educational outcomes must be listened to and fully respected,  they should be paid well (but not higher than similar positions in the private sector in the community in which they work) and they must expect students and parents to live up to their end of the social contract. Given their critical role in the system, they must be held to a very high standard of performance – those that meet the standard should be rewarded and those that do not need to be removed immediately. Failure to do so is a crime against the students and demoralizing to the rest of their high performing colleagues.
  2. In-School Administrators (Principals, Assistant Principals, etc.) – this group includes everyone with the responsibility for leadership, standards and administrative infrastructure at the school level. They must establish the performance standards for everyone in direct contact with the students, hold them accountable for the standards set and establish an environment that is conducive to delivering a high quality education to the students. Further, they are there to make sure that those individuals with the direct responsibility for educating the students are not hindered in performing their jobs. The In-School Administrators must be held strictly accountable for the performance of the schools they lead and also be given the authority and resources needed to carry out their responsibilities. **Update** – Superintendent Davis seems to agree with the “accountability” part as he was quoted in the AJC article by Jamie Sarrio as saying “on many occasions he believes principals have a “duty of care” and should be held responsible for what happened at their schools”.
  3. Operational functions – these individuals are critical to creating a clean and safe environment in which students learn. While they are often ignored, they keep the schools clean, they keep the buildings operating, they operate the bus service, they provide meals and they provide a safe environment in which the students can learn. When they fall down on the job, chaos ensues and it is difficult, if not impossible, for the rest of the school system to operate effectively. Often, they are forgotten heroes – let’s remember how important they are to an effective system. At the same time, they have a responsibility to be cost efficient as they carry out their responsibilities.

Infrastructure & Leadership – they must build and lead an efficient organization

  1. School Administrators – these individuals are responsible for establishing the infrastructure that allows the in-school administrators, teachers, media specialists and guidance counselors to be more effective in doing their jobs.  Their job is to set overall policy and standards and then hold people accountable for them. Then they must get “out of the way” and let the front-line troops do their jobs. They also have a responsibility for implementing new programs and reforms, but must also establish the clear benefits, improvements and outcomes that are expected from implementing those reforms. And then they must be strictly accountable for achieving the results that they anticipated. How often have we seen “reforms” started, with hazy objectives and no timelines, that are measured based on the “goodness of the intent” versus the documented results? If this group asks for more resources, they must establish clear objectives and then be strictly held accountable for the results achieved.
  2. General Administrators – these individuals are responsible for establishing the required infrastructure needed to effectively serve the needs of the instruction and operational functions and to do so as cost efficiently as possible. As the with the school administrators, they are supposed to be the experts in their areas of responsibility. Excessive use of “outside consultants” brings into question their level of expertise. They are responsible for solving infrastructure problems and knocking down the barriers that get in the way of the front-line troops delivering to the consumer. Their complaints and excuses should only be met with one response – fix it or find another job. Their demand for more resources should only be granted if they can demonstrate the tangible benefits of improved results and they must be held strictly accountable for the results which are based on clear performance standards, documented metrics and cost efficiency. These individuals are highly paid for their expertise – our expectations for results from them should be high and uncompromising.
  3. Board of Education and Superintendent – as the leaders of the organization, this team has to set the overall direction and objectives for the school system. They ultimately have the responsibility to weigh all the factors and interests of the constituent groups and the system as a whole and to then make the decision. Once the decision is made, the Superintendent has the responsibility for executing and implementing the decision. Further, the Board of Education has the direct responsibility to the voters and taxpayers to be judicious and prudent in their use and allocation of funds. Ultimately this team is responsible for ensuring the mission of the school system is achieved as effectively and cost efficiently as possible.

Investors – the money source that expects a solid return on their investment

  1. Taxpayers – ultimately, as taxpayers, we are the shareholders and investors in the school system and we have a right to expect excellent results from the system we are paying for; we have a right to expect prudent and responsible stewardship of the taxes paid; we have a right to expect high standards of performance and we have a right to expect excellent results in the education of our children.  And while I place the taxpayer at the bottom of the list in terms of priority, when budgets are being prepared, when resources are being allocated and when reorganizations are being considered, then the taxpayer is at the top list in terms of consideration.

Of course, after setting up the constituent groups above, their priorities and their responsibilities regarding decisions that must be made, there will always be conflicts and the balancing act required is a tough job. However, Board members have willingly stood for election and in turn have selected the Superintendent. As such, they have willingly accepted the responsibility for making the tough decisions and we, as voters and taxpayers, have the responsibility to hold them accountable for their success or failure in doing so.

My Fundamental Budgeting and Personnel Assumptions

May 18, 2012

The following are certain key fundamental assumptions regarding how the budget should be prepared and the organizations expectations regarding the performance of the key Executives.

  1. Zero Based Budgeting (adopted by APS as the basis for budgeting) – each function must substantiate the reasons why it should be funded and then show substantial justification for the funding requested. The substantiation must be in terms of the benefit to the organization and its customers and must be fully supported by key metrics that justify the funding request.
  2. New Function or Initiative – any new function or initiative must have clear and measureable objectives and outcomes and a timeline for achieving them. Additionally, the function or initiative should generally be “self-funding” – either through generating incremental revenue or reducing cost in other areas of the organization. Any new function or initiative that cannot meet this test should not be undertaken.
  3. Executive Management– the key leaders in an organization must have the following talents:
    1. They are experts in their specific areas of responsibility and bring extensive knowledge and experience to the positions they hold in the organization.
    2. They are excellent administrators and are highly capable of personally organizing, managing and executing the mandates for their respective divisions.
    3. They propose, implement and administer policies and procedures that improve organizational effectiveness.
    4. They know their customers and strive to meet and exceed the expectations of their customers – whether internal or external.
    5. They are outward and forward looking and are constantly assessing how to improve the products and services created for their customers.
    6. They are continuously searching for ways to improve the cost efficiency of their divisions.
    7. They understand the requirements of their divisional functions and select highly capable middle management personnel that can execute on the policies, procedures and output demanded by their customers.
    8. They demand and expect excellence from their own divisions and excellence from the other divisions with whom they interact and rely on.
    9. They are the “change agents” of the organization – when organizational changes have to occur, the executive team provides the leadership to make the changes happen throughout the organization.
    10. They understand that they are key members of a team and they are tasked to accomplish the mission of the organization – no single division is more important than the others as each division must rely and use the products and services provided by the other divisions – there are no “prima donnas”.
  4. Middle Management – this key group of individuals are assigned to complete the specific functions required so that the division meets its mandates from the rest of the organization. This group of managers also represents the sole and exclusive “staff” needed by the Executive to meet the Divisional mandate.
  5. Extensive Use of Consultants– extensive use of Consultants indicates that the Executive team is failing on the following points from above.
    1. They are experts in their specific areas of responsibility and bring extensive knowledge and experience to the positions they hold in the organization.
    2. They propose, implement and administer policies and procedures that improve organizational effectiveness.
    3. They are outward and forward looking and are constantly assessing how to improve the products and services created for their customers.
    4. They are continuously searching for ways to improve the cost efficiency of their divisions.
    5. They are the “change agents” of the organization – when organizational changes have to occur, the executive team provides the leadership to make the changes happen throughout the organization.
  6.  Outsourcing Functions or Activities – when there is an ability to purchase services that can accomplish what is required with the same or improved output and more cost efficiently, then the organization should do so. However, when the organization chooses to outsource a function or activity, the organization must remove all internal costs or much of the cost efficiencies of outsourcing are lost.

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