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Administrator’s Corner by Paul Durbahn

On the heels of the news of budget reductions at our latest school board meeting, I personally wanted to provide some context to our community regarding our financial future. What was presented to the school board Monday, March 3, was our 2024-25 revised budget. In simple terms, the revised budget is a snapshot of where our budget is in the current school year, and demonstrates whether we are on pace to meet our adopted budget. Every year we are required to pass a preliminary budget in the spring (for the upcoming year), a revised budget during the year and a final budget for the school year in June. All district finances are audited fully by independent auditors every fall.

In general, when we make budget adjustments, it is to maintain our fund balance goal based on the amount of revenue our district receives. The adjustments we discussed at last week’s board meeting are for next year’s budget (2025-26) which will begin on July 1. The goal of those adjustments is to ensure we maintain a healthy fund balance.

To every extent possible, we use our funds to best support our students. Approximately 80% of our expenditures are designated to payroll and benefits. Schools are not banks, we don’t stack money in reserves. This is mainly because our revenues are fairly predictable. The downside to not building up large sums of cash is we have to be agile with adjustments to ensure financial strength each school year.

However, it is also important to plan for the future and ensure we can sustain programming and opportunities for our students and community. It is our responsibility to provide the best possible education to the students of our community while preserving financial stability so we can ensure strong opportunities continue. As you can imagine, that can be a balancing act.

Right now, schools are facing challenging financial circumstances. We are seeing budget reductions across the state. Schools are also seeing an increase in costs due to new labor laws (paid leave, unemployment, etc.) as well as legislative mandates. Some labor laws, although positive in intent and have a positive impact on employees, are coming with hidden costs as well (ie. substitutes, staff shortages). Inflation is hitting the school just like it is you and your family. Any contracts for services are increasing at higher rates than we can keep up with. Our insurance costs are projected to increase considerably this year — early estimates are forecasting 10%.

The number of students in seats is the greatest factor in generating revenue. For the foreseeable future, our graduating senior classes will be much larger than our kindergarten classes, and the result of the decreasing enrollment will mean less revenue due to how schools are funded. Of course, this is a projection and we’d love to see a reversal in this trend. Our community has a lot of positive initiatives and opportunities, and Albert Lea could see a population change for the better. Unfortunately we can’t build our financial projections on hope, we have to use hard numbers.

Our school board has a policy that we will strive to maintain 12% of our general fund annual budget in our unassigned general fund balance. Basic accounting will tell you, when our operating costs and expenditures increase beyond our revenues, this will bring our fund balance percentage down.

As noted earlier, Minnesota school revenues are generated on formulas that are driven by enrollment. About 83% of our revenue is generated from state aid, and 11% via local levy (property tax), both of these are impacted by our student counts. In terms of aid, the state committed to a basic formula increase of 2.74% for the 2025-26 school year, which was based on inflation. A misnomer is the increase in the formula is a straight 2.74% across all revenues. It isn’t. In Albert Lea, it only impacts about 49% of our general fund revenues. The rest of the funding formulas won’t see an increase. Further, the formula increase is an increase to a per pupil formula, so when enrollment declines, it lessens the multiplier. We’ll likely see less revenue from the state in 2025-26 than we do this year.

Most school districts carry an unassigned fund balance between 8 to 12%. In general, this is a healthy standard. If a school’s general fund balance drops below a -2.5% that is considered a statutory operating debt (SOD) threshold where the state would step in to administer and oversee an SOD plan. The 2024-25 revised budget, our snapshot, showed that we’re projecting to end the year with a healthy 11.01% fund balance, far from what would be considered a concern. The adjustments we are making are to ensure that we don’t compromise on that and we steer the district back to the 12% fund balance that our board policy requires.

To provide clarity on our budgeting process, if the district’s budget was executed perfectly this year, it would still be necessary to reduce our next year budget by over $2 million. The reductions we are projecting annually are due to decreased enrollment for years to come (which means decreased funding) and an effort to maintain 12%. This year that reduction was forecasted to be more challenging to get there for next year because our costs and expenditures are higher than planned.

We are projecting incoming kindergarten classes of 216, 213, and 195 over the next three years (based on birth rates and county births). We are projected to lose senior classes of 248, 260, 256 respectively. Averaging a drop of 47 students a year.

Our substitute teacher payroll costs are up over $100,000 this year compared to prior years at the same time. There are many reasons for this; however, it shows that schools are impacted by labor laws and staffing shortages. We have to backfill teachers and paras when possible.

Underfunded or unfunded mandates are straining us further. Schools are facing mandates that include curricular requirements, instructional strategies and unemployment.

These decisions are not made by our local school board, they are dictated by state legislation. Our schools look different today than they did even 10 years ago. Our students have different needs, and our community desires different programming. From special services, to career technology education, to mental health supports, family resources, student activities, the list goes on. Schools are taking these responsibilities on. Just because the state is sending more money to schools, it does not mean we are realizing any of those increases, nor does it mean we can use it how we determine necessary.

Simply put, the revenue we generate does not pace with the increasing costs we incur. Without a change in our model or an increase to our revenue stream, Albert Lea Schools will likely make substantial budget adjustments annually in order to maintain a healthy fund balance.

That is, we are committed to ensure that we can maintain our healthy financial position. We are in a stable place financially. On top of that we operate in a system with heavy fiscal oversight. We present budgets to the school board three times a year and complete an independent audit annually. The state and federal governments have many regulations that we comply with, including a uniform financial accounting and reporting standards (UFARS) of which every dollar is tracked to a unique finance code.

In closing, I hope the community can understand the difficulties schools are facing today. We, however, are in a good place financially. We greatly value our staff and as unfortunate as reduction plans are to process, the proposed adjustments are responsible. We have to do something in response to our projected enrollment decline. I would encourage anyone who wants clarity on school district finances to please reach out to me, and I’d be happy to discuss and answer any questions.

Thank you for supporting Albert Lea Schools!

Paul Durbahn is the executive director of finance and operations for Albert Lea Area Schools.