MPCSD Structural Deficit FAQ

Thank you for visiting our Structural Deficit FAQ (Frequently Asked Questions) site. The following Q & A represents those questions that have been asked by a number of people via our community input process OR have been asked by one person, but the answer might be instructive for all.

This is a “living” site. We will continue to add questions as we receive them and verify the answers for accuracy. Should you have a clarifying question about or wish to add a question to the FAQ, please email the Superintendent’s Advisory Committee on Communication at commadvisoryteam@mpcsd.org. The volunteers who staff the email will do their best to get back to you in a timely manner.

Below you will find the contents of the FAQ. Each question is hotlinked to provide you with quick access to the answer for which you are looking.

Section 1: Budget & Funding Questions

• How does the 1978 Proposition 13, known as “Prop 13,” impact school funding in California?
• How is MPCSD funded differently than most other school districts in the state?
• How has the state’s 2013 school funding law known as LCFF (Local Control Funding Formula) changed the way in which schools are funded in California and how does that impact MPCSD?
• How has school funding evolved in Menlo Park City School District?
• How does the increase in school funding correlate to student achievement gains in MPCSD?
• From where does MPCSD’s funding come?
• What is MPCSD’s annual budget, and how is it allocated?
• How and when is MPCSD Budget determined and managed?
• How does the funding we receive and the money we spend per student compare to our similar peer districts?
• How does overall California school funding compare to funding across the country?
• How does MPCSD per student funding compare to the per student funding in communities like ours around the country?          
• Why is Menlo Park’s parcel tax burden higher than that of neighboring districts?
• What actions has MPCSD taken to improve its Fiscal Responsibility?
• How is MPCSD attempting to include the whole community in the discussion around its financial situation?

Section 2: MPCSD’s Current Structural Deficit

• What is a structural deficit?
• What is causing the current structural deficit?
• What is the extent of the budget deficit that the district is facing?
• Why are pension costs for district staff increasing and does MPCSD have any options?
• How has enrollment changed in MPCSD since 2005?
• Was 2010’s Measure C Parcel Tax that is expiring intended to be temporary?
• Are MPCSD teachers overpaid?
• How and when are salaries negotiated in MPCSD?

Section 3: Reduction Considerations

• What has MPCSD done so far to address the structural deficit? 
• Why is the district considering reductions in art, music, and library? Aren’t the specialists funded by the Menlo Park-Atherton Education Foundation?
• Does Menlo Park have too many administrators? 

Section 4: Funding Options (including Parcel Tax)

• If the District puts a parcel tax measure before the community, when would that happen?
• How much would a parcel tax have to be to solve the current deficit?
• Will any option to address the Structural Deficit be a “permanent solution”?
• With such high real estate values in Menlo Park, why is parcel tax funding even necessary for our schools?
• Given the recent strength of the real estate market in Menlo Park, why doesn’t growth in property taxes meet the district’s funding needs?
• How much of my property tax bill goes to fund our schools?
• Is the property tax revenue projection a conservative estimate?
• Can MPCSD tap into its budgetary reserves to address the structural deficit?
• How will the Passage of Prop 55 impact revenue in MPCSD?
• What happened to the rental income that MPCSD used to receive?

Section 5: Other Considerations

• What does research say about the correlation between school quality and home value? 
• Why don't we combine the three local school districts (MPCSD, Las Lomitas, Ravenswood) into one in order to reduce costs/redundancies?
• What is the cost to the district of allowing interdistrict transfers of children of MPCSD staff members?
• If I just want to understand the high-level summary of the Pension challenges facing MPCSD, what do I need to know? 
• How are pensions determined and managed in Menlo Park City School District?
• What is the amount of the unfunded pension liability?
• What is the current plan to eliminate the unfunded pension liability?
• What are the risks to the CalSTRS 2014 Funding Plan and, as a consequence, what are the risks to MPCSD?
• What can the District do to address the unfunded pension liability?
• What if the 2014 Funding Plan is inadequate? Can the District guard against further risk?

Section 1: Budget & Funding Questions

How does the 1978 Proposition 13, known as “Prop 13,” impact school funding in California?

The last time California was near the top of the nation in terms of school funding was 1965, when it ranked 5th. In 1978 – the year Prop 13 passed –California was 14th out of 50. The next year, the state fell to 22nd place. In 1988, California fell below the national average for the first time and never recovered (SOURCE:http://www.kpbs.org/news/2010/mar/26/prop-13s-impact-schools/). As of 2014, the state ranks 35th (SOURCE: Governing calculations of per pupil current spending data published in U.S. Census Bureau Annual Survey of School Systems). So what is “Prop 13” and how did it have such a deleterious effect on public education funding?

“Proposition 13, adopted by California voters in 1978, mandates a property tax rate of one percent, requires that properties be assessed at market value at the time of sale, and allows assessments to rise by no more than 2 percent per year until the next sale. This means that as long as property values increase by more than 2 percent per year, homeowners gain from remaining in the same house because their taxes are lower than they would be on a different house of the same value. Proposition 13 thus gives rise to a lock-in effect for owner-occupiers that strengthens over time. It also affects the rental market, both directly because it applies to landlords and indirectly because it reduces the turnover of owner-occupied homes.

As a result of Proposition 13, there are obvious distortions in the real estate marketplace. A striking illustration was described in 2003 when financier Warren Buffett announced that he pays property taxes of $14,410, or 2.9 percent, on his $500,000 home in Omaha, Nebraska, but pays only $2,264, or 0.056 percent, on his $4 million home in California.” National Bureau of Economic Research 

A similar imbalance exists in Menlo Park, where 60% of single-family homes within MPCSD’s boundaries have not been reassessed in over ten years, including 35% of all single-family homes that have not been reassessed in over 20 years. Property taxes are paid on the assessed rate, not the market value, of the property. Thus, property owners pay vastly differing amounts in tax even when the properties lie within blocks of each other, depending solely on when the property was most recently assessed.

Before Prop 13, districts could count on tax income to meet their funding needs. They set their budgets, went to the county assessor, the property tax rate was set, and schools collected the money they needed. In 1978, California school budgets were upwards of $9 billion. The following year - with the passage of Prop 13 - those budgets were slashed, nearly overnight, by $3 billion--one third of the money available for local schools. Now, districts are limited to the funding they either receive from the state (for lower income/lower property value districts) or can raise on their own through local property taxes and donations (for community-funded districts). MPCSD is a community-funded district, and therefore must make up most of its budget through local taxes and donations to the MPAEF. Because the district cannot control the property tax revenues it receives, the only significant way to secure needed additional funding and avoid significant reductions is through the local passage of parcel taxes.

How is MPCSD funded differently than most other school districts in the state?                 

There are two ways by which public school districts can be funded in California. Districts are either “state-funded” (a.k.a. “revenue limit”) or they are “community-funded” (a.k.a. “Basic aid”). MPCSD is a Community Funded (Basic Aid) District. As such, it is important to note that MPCSD does not receive additional funds as enrollment increases, unlike state-funded districts. The only way to meaningfully increase revenue in a community-funded district is to pass a parcel tax or seek donations.

How has the state’s 2013 school funding law known as LCFF (Local Control Funding Formula) changed the way in which schools are funded in California and how does that impact MPCSD?

In the last hundred years of California public education, the single biggest change to school funding is clearly the passage of Prop 13 in 1978. However, the next biggest change is the 2013 passage of the Local Control Funding Formula, known as LCFF.

The Local Control Funding Formula is, according to EdSource, “An ambitious experiment in school finance and governance that Gov. Jerry Brown proposed in 2012 and the Legislature passed in 2013. Brown optimistically and enthusiastically expressed his aspirations for the Local Control Funding Formula on signing what he called a ‘truly revolutionary’ law.” The LCFF law has three intended goals:

1. Fund schools equitably
2. Make decisions locally
3. Measure school achievement broadly

Certainly, these goals are admirable. Practically speaking for communities like Menlo Park, it means more of the state’s money going to higher-need districts and more of the burden to educate its youth remaining with those communities that can afford to pay for their local schools. State-funded districts receive millions of dollars in what are known as “supplemental” and “concentration” grants provided to districts based on the number of students whose native language is not English and/or whose families are considered low-income. Community-funded districts, such as MPCSD, receive far less from the state by design. MPCSD receives less than $500,000 each year from the state via supplemental grant funding and no concentration grant funding. By comparison, Ravenswood School District that serves East Menlo Park and East Palo Alto and has just a few hundred more students than MPCSD received over $5.8 million due to the high numbers of students from low income and non-English speaking families.

In addition, implementation of LCFF in 2013/14 resulted in a permanent reduction in state funding for MPCSD and other community-funded districts.  During the Great Recession of 2008-2013, the state cut funding to K-12 education by about 20%.  Because community-funded districts (referred to as “basic aid” at the time) did not receive state aid, per se, the state cut the categorical programs (grants) proportionally.  This was referred to as “fair share” reductions.  The state’s intention was to restore fair share cuts made to basic aid categorical funds as revenue limit funding was restored.  However, the LCFF school finance reform eliminated revenue limits and most categorical programs.  LCFF “holds harmless” all districts at 2012/13 funding levels and redistributes new monies according to the formula.  This makes the reduction in basic aid districts’ state categorical funds a permanent cut.  Where MPCSD had received almost $2 million in categorical funds before the recession, the District now receives $432,027 under LCFF (an amount that will never increase).

With the state’s effort to push more of the burden of extending the solvency of the teacher’s state pension program on the local school district and current discussions at the state level of moving Special Education funding into the LCFF, it is clear that the state desires to change the state’s role in funding public schools. For higher-need districts that rely on the state for a large percentage of their funding, the state is a shared partner in managing risk. For those districts, like Menlo Park City School District, the move to greater local control may sound good, but practically speaking, it means that MPCSD bears nearly all of the risk associated with rising costs and economic cycles while at the same time having no control over the laws that dictate what it must provide.

How has school funding evolved in Menlo Park City School District?

For many years, Menlo Park City School District lagged behind its neighbors in offering small class sizes, providing a breadth of electives, and achieving top scores on academic performance indicators. District and Board leadership recognized the need for increased local funding to improve the conditions and quality of MPCSD beginning in the mid-1990s with the first of three facilities bonds and four parcel taxes. As aging sites began to be updated or rebuilt as a result of the three successful bonds, so to where improvements to the programming and teaching & learning innovations that have allowed MPCSD to become the award-winning, student-centered district it is today. To ensure these efforts could continue and expand, the community resoundingly passed:

• April 2000 evergreen parcel tax to improve children’s academic performance, reduce class size, improve teacher quality, and expand courses;
• November 2003 evergreen renewal of 1995 parcel tax to maintain smaller class sizes for all students;
• November 2003 additional evergreen parcel tax to restore programs lost due to state budget cuts, including funding for remedial math and ‎reading, textbooks and materials, and to prepare teachers in the most effective teaching techniques in math, reading, and science‎;
• May 2010 temporary (7 years) parcel tax (Measure C) to address growing enrollment and maintain small class sizes and educational programs, and fund teachers.

The May 2016 defeat of the Measure C renewal and the additional Measure A are the first failed parcel tax measures in MPCSD history. Unless funding is secured this will mean the dismantling of many years of work that has brought MPCSD to the top tier of California schools, and made them a destination even compared to our high achieving peer districts, which receive significantly more funding per student.

How does the increase in school funding correlate to student achievement gains in MPCSD?

Menlo Park City School District provides a comparable or better learning experience to our neighboring high-achieving school districts. However, that wasn’t always the case. On nearly all measures that matter to a community — class size, high quality teachers, electives/arts, technology, facilities — MPCSD provides an equivalent or better experience than our peers. We have been able to do so because of the thoughtful leadership and financial stewardship of our Board and district staff since the mid-1990’s. Below is a chart and table that illustrates two realities:

• MPCSD achieved higher growth with less funding.
• The Board and District’s work to increase funding correlates to higher student achievement.

2013-14 Achievement Data Compared to Academic Outcomes

Table 1: Revenue Per Student

Table 2: API Comparisons Over 8-year Period

* = The API (Academic Performance Index) was a measurement of academic performance and progress of individual schools and districts in California. It was one of the main components of the Public Schools Accountability Act passed by the California legislature in 1999. The range of API scores extends from a low of 200 to a high of 1000. The API stopped being used as a measurement in 2013 with the introduction of the Common Core Standards; a new measurement tool begins in 2017.

From where does MPCSD’s funding come?

As a community-funded district (see here for explanation), MPCSD receives 62% of its funding from property tax revenue. Beyond property taxes, the local community provides another 25% of the district's funding, primarily through parcel taxes and foundation giving. State and federal funding accounts for only 13% of MPCSD's budget, and 4% of this is pass through money for the State Teachers’ Retirement (STRS) that has no effect on the MPCSD budget. The State Teachers' Retirement System (STRS) is funded by contributions from the employee, employer, and State.  Beginning in 2014-15, districts were required to report the contributions made by the State on behalf of local employees even though State contributions are made directly to STRS and no monies actually flow through the districts.  Click here for the State STRS On Behalf payments reported to date.

2016-17 Adopted Budget

What is MPCSD’s annual budget, and how is it allocated?

The best way to find out more about the MPCSD budget is to utilize our OpenGov resource on the district’s website. OpenGov is an online tool used by over 1,200 public agencies to “drive operational excellence and build public trust.” The platform supports the district’s budgeting process, provides accurate management reporting, and informs the public with open data.

In most simple terms, the following pie chart details MPCSD’s overall budget “buckets.” The terminology used is directly from the state. It can be confusing, but we’ve tried to simplify it for ease of use. Of note, over 85% of the budget is dedicated to instruction, instruction-related services, and student services.

Another way of looking at the budget is below. This pie chart illustrates that nearly 90% of the MPCSD budget is spent on the salaries and benefits of personnel. When considering reductions in a budget that is 90% personnel, there is no way to reduce $5.3 million without significant reductions in personnel.

How and when is MPCSD Budget determined and managed?

The budget cycle is prescribed by Ed Code, summarized in Board Policy 3460, and subject to oversight by the County Office of Education.  It is prepared under the supervision of the district’s Superintendent and Chief Business and Operations Officer and approved by the Board of Trustees in a public Board meeting.  The Board is required to certify the financial condition of the district for the current and two subsequent years when the budget is adopted (by July 1) and at two interim reporting periods.  (First interim ends October 31 and second interim ends January 31.  Each interim report must be Board approved and submitted to the County Office within 45 days after the close of the reporting period.)  The certification is stated as positive, qualified, or negative depending on the district’s ability to meet the State mandated reserve level for the current and subsequent years (3% of expenditures).  The books are then closed after June 30, and the Unaudited Actuals are reported by September 15.

At each reporting period, the County Superintendent of Schools is required to review and approve the financial statements of the district and issue a letter addressed to the Board president with any findings.  Ed Code provides authority to the County Superintendent of Schools to take certain actions necessary to ensure that a district meets its financial obligations if at any time the County determines that the district may be unable to do so for the current or two subsequent years or if a district has a qualified or negative certification. Generally a district would receive a qualified or negative certification if its economic uncertainty level falls below 3%. (Refer to Ed Code 42127, AB 1200, and Board Policies 3400 series.)

The budget is entered into the accounting system and all principals and program managers have access to their budgets to monitor expenditures.  The Director of Fiscal Services and accountant meet with principals and program managers to review balances as well as business office procedures.  The Director of Fiscal Services periodically reports program budgets to both the principals/program managers as well as the Chief Business and Operations Officer.  Budget transfers are summarized and taken to the Board in monthly resolutions, or as often as necessary, for Board approval between reporting periods.

How does the funding we receive and the money we spend per student compare to our similar peer districts?

What is so encouraging about the conversation of our structural deficit is the clear reality that Menlo Park City School District residents receive far more value for their tax dollars than our neighboring, similar communities. Since 2000, MPCSD has doubled or tripled the rate of student achievement increase compared to our neighboring districts. We offer similar class sizes and arguably better instruction. Additionally, the programs available to our students are second to none. We do all of this for less money than any of our peers. The table below illustrates how much each district receives (revenue) and how much each spends (expense), when averaged out across all students in the district.

        *This number is slightly higher than the Funding number because of planned spend-down of reserves this year.

How does overall California school funding compare to funding across the country? 

Per student spending varies widely across states. The last time California was near the top of the list in per student spending was 1965, when it ranked 5th. In 1978 – the year Prop 13 passed –California was 14th out of 50. The next year, the state fell to 22nd place. In 1988, California fell below the national average for the first time and never recovered. The state now ranks 35th. This table for the Census Bureau details per-student spending in each state and the average for the US. California is below the US average of $11,009 at an average per student spending of $9,595--about the same amount of money as the state of Arkansas. At around $14,000 in per student spending, Menlo Park is at approximately the 60th percentile in per student spending in the country, yet Menlo Park and Atherton are among the most expensive zip codes to operate schools in the country.

How does MPCSD per student funding compare to the per student funding in communities like ours around the country?  

The national average for per student spending in the US is just over $11,000. Across the country, highly educated, diverse communities that serve mostly middle to high income families similar to Menlo Park choose to make even higher investments in their children’s education than their respective states require or provide. Below is list of comparable communities outside of California that invest greater sums of money to their local public schools through the avenues provided to them by their respective state laws.

Even more illustrative of the difference, class sizes in these peer districts are consistently around 16:1 (students to teacher) with additional full-time aids in the classrooms, compared to MPCSD’s 22:1 (student to teacher) average K-3 with only part-time aids a couple hours per day.  Considering that MPCSD is consistently benchmarked in the top quartile in terms of quality of education, one could argue that the district is spending its revenue very well and significantly outperforming its spending levels.

Why is Menlo Park’s parcel tax burden higher than that of neighboring districts?

Simply put, MPCSD receives fewer property tax dollars per residential property and enrolls more students per residential property than comparably performing, neighboring districts. This property tax differential is so great that a higher parcel tax is required to fund our schools, even though we deliver a high-quality education at a lower per-pupil cost than our peers.

Comparing Menlo Park to four comparably performing elementary school districts in San Mateo County (Hillsborough, Las Lomitas, Portola Valley, and Woodside) illustrates the reasons why MPCSD receives less property tax revenue per student than these comparably performing districts.

These other districts benefit from a property tax revenue advantage in the following ways:

• Higher property values.  On average, the assessed value of parcels (residential properties) in these comparable districts is ~20% higher than in Menlo Park (~$2.0 million vs. ~$1.7 million).
• Bigger share of property taxes.  The comparable districts receive nearly 10% more revenue from each property tax dollar than MPCSD (20.3 cents of every property tax dollar vs. 18.6 cents). The difference is an unintended consequence of the implementation of Prop 13, when allocations of property tax dollars were (somewhat arbitrarily) “frozen” at historical shares.
• Fewer students.  The comparable districts support 8% fewer enrolled students per parcel than does Menlo Park.
• The net result is that the comparable school districts receive nearly 50%, or $4.5K, more property tax funding per student than MPCSD ($13.9K vs. $9.4K). 

Here are the current 2016-17 parcel tax amounts (per parcel) for Menlo Park and our comparable districts:

• MPCSD: $875
• Hillsborough: $651
• Las Lomitas: $311
• Portola Valley: $581
• Woodside: $289 

On average, our district collects over $400 more per parcel through parcel taxes than the other districts. This results in approximately $1,000 more parcel tax funding per student, relative to comparable districts. This higher parcel tax burden is critical to delivering the quality of education our community expects, but it comes nowhere near erasing MPCSD’s $4,500 property tax disadvantage (see above). With the expiration of the 2010 Parcel Tax the total parcel tax collected by MPCSD will be reduced by about $207 or 24%.

What actions has MPCSD taken to improve its Fiscal Responsibility?

As MPCSD has grown into an award-winning, top performing district, it has taken its responsibility for providing a world-class education seriously. While offering a robust student experience is its first priority, being careful stewards of the public monies which fund its programs is of profound importance. Since the early 2000s, MPCSD has worked continuously to ensure the highest level of financial integrity and transparency, reflecting the values of the district staff, and those expected by the business-savvy community which the district serves.

MPCSD proactively contracted with School Services of California, the premier business, financial, management, and advocacy agency for educational agencies in California. With this guidance, MPCSD has implemented financial best-practices and become a model for districts across the state . Over the past ten years, MPCSD has accomplished the following:

• Established Board Policy 3470 for financial reserve levels of a community-funded districts.
• Created Finance and Audit (FA) Committee - made up of community members - reporting to the Board. The FA Committee assists the Board in the selection of the audit firm and review of the District financial reports. A requirement was put in place that auditors meet with FA Committee members without district administrators present.
• First in the state to receive AAA credit rating from Moody’s Analytics for bond issuance.
• Refinanced bonds to reduce outlay and return money to the taxpayers. This use of refinancing is now state law, yet MPCSD took advantage of better bond rates for the purpose of returning taxpayer dollars before there was any mandate to do so.
• Developed a new Interactive Financial Web Portal in partnership with OpenGov to make financial records readily available to the public.
• Established respected best practice staffing standards as MPCSD transitioned from a small sized district to a medium sized one, including the right-sizing of district administration to ensure most efficient use of staff time and funds.
• Initiated participation in the California Employers' Benefit Trust (CERBT) Fund, a trust fund dedicated to pre-funding Other Post Employment Benefits (OPEB) for all eligible California public agencies. By joining this trust fund, California public agencies can help finance future costs in large part from investment earnings provided by CalPERS. In addition, MPCSD funds OPEB at a higher rate than required by law to maximize savings.
• Requested San Mateo County Treasurer to move district monies from the County investment pool into safer Federal Treasury Notes during the financial crisis.  
• Changed parcel tax accounting procedures so funds were deposited directly into the General Fund rather than a separate fund (Fund 17) to create greater transparency.
• Continued and ongoing evaluation of Student Service to improve effectiveness and efficiency. In 2015-16, a Program Specialist position was reduced and clerical position was suspended. A new Special Education Coordinator position was created and duties redistributed internally to reduce administration. These changes resulted in a net savings to the District. Contracted services were minimized or eliminated where possible and high quality staff provided improved services to students.
• Developed a new long term financial model to assist the District with better planning by using a model that would predict property tax growth and expenditure increases more accurately.

How is MPCSD attempting to include the whole community in the discussion around its financial situation?

Well performing, highly-regarded schools benefit the whole Menlo Park and Atherton community; yet, current MPCSD parents only make up about 15-20% of the adult population. Hearing input from a large percentage of members of the parent AND non-parent community about their values and expectations from schools, how well the district is accomplishing its goals, and what directions and priorities the district should pursue is of utmost importance to the district staff.

To engage the whole community, the district began a process of dialogue in late September around the topics of:

• Reaction to the failure of June 2016 Measure C renewal and Measure A new parcel tax.
• Superintendent’s recommendations for potential reductions beginning in year 2016-17.
• Alternatives to reductions, including a potential parcel tax.

Several avenues through which the community could provide input were opened, including:

• Board meetings and community input sessions were held on September 27, October 18, 24 and 25. Sessions were video recorded, posted to the MPCSD website, and transcribed for public record.
• Online feedback form, available on the MPCSD website from October 1-31, 2016.
• Email channel for direct feedback: commadvisoryteam@mpcsd.org.

Notice of these input avenues was made through school newsletters, press releases, paid newspaper ads, and various social media platforms.

In addition to the steps taken and facilitated by MPCSD, a broader community survey was mailed to adult residents within the MPCSD borders and all MPCSD parents the week of October 24 by Panorama Education. The survey, intended to become an annual outreach effort, was created in partnership with Panorama, which was solely responsible for the printing and mailing of the survey. Unfortunately, there was no return address included on the survey envelopes, leading some to either miss or mistake the survey for something else. This was entirely unforeseen by the district. If you have missed your survey or lost your personal survey access code, please email commadvisoryteam@mpcsd.org to request a replacement.

Section 2: MPCSD’s Current Structural Deficit

What is a structural deficit?

A deficit is structural — or built in — when it results from a fundamental imbalance in funding and expense, as opposed to a temporary deficit that is caused by one-time or short-term factors. In other words, a structural deficit occurs when expenses (outgoing costs) exceed funding (incoming monies) on an ongoing basis.

What is causing the current structural deficit?

Menlo Park City School District is facing three challenges:

1. Measure C expires at end of June 2017. In 2010, voters approved a temporary parcel tax to offset the impact of the national financial crisis and to address increased enrollment. This parcel tax expires June 30, 2017. The expiration will result in a decrease of $1.6 million per year.
2. Continued enrollment increase. Since 2005, MPCSD has experienced a 40% increase in student enrollment. Since the expiring 2010 Parcel Tax (Measure C) passed, MPCSD has experienced an 18% increase in student enrollment. By 2025, it is anticipated that MPCSD will have added an additional 300+ students to the 3000 students we currently serve. As a Community-Funded District (see here for explanation), MPCSD receives NO additional funding when enrollment increases. Interestingly, MPCSD is the only local district experiencing this level of enrollment increase; Palo Alto, Portola Valley, Redwood City, Woodside, Las Lomitas, and Ravenswood are all experiencing static or decreasing enrollment.
3. Increased pension costs. The state of California has pushed a larger percentage of pension costs for certificated staff to the local school districts, mandating a district contribution rate increase from 8.25% in 2013-14 to 19.1% by 2020-21 for certificated staff (CalSTRS). Equivalent additional increases for classified staff are also expected as part of the CalPERS pension system. These increases amount to almost $3 million in added costs each year by 2020-21. The following table illustrates the real-dollar total costs:

*Anticipated costs based on staffing assumptions.

What is the extent of the budget deficit that the district is facing?

Careful consideration has been given to projecting out funding and expense levels for the period of five years. Were MPCSD to continue the current level of services to students after the implementation of the the $900,000 in reductions (itemized here) made during the 2016-17 school year, MPCSD will be short $5.3 million by 2021-22. This estimation takes into consideration the following three factors influencing the deficit, as well as a myriad of necessary budget assumptions.

1. The expiration of the 2010 Measure C Parcel Tax (loss of $1.6 million annually)
2. Increased pension costs (an additional $3 million annually by 2020-21)
3. Increased enrollment (an additional 300 students by 2025-26)

Why are pension costs for district staff increasing and does MPCSD have any options?

MPCSD is required by law to participate in two state-managed and state-administered pension programs. Certificated employees (i.e., credentialed teachers, who represent 80% of the District’s salary cost) participate in the California State Teachers’ Retirement System (CalSTRS). Classified employees (who represent the other 20% of the District’s salary cost) participate in the California Public Employees’ Retirement System (CalPERS).

For both programs, the state determines benefits programs and contribution levels. MPCSD, as well as its employees, must participate and contribute to the pension funds as specified by the state. The state, employers (such as public school districts), and each staff member must all contribute to the system, albeit at different rates (percentage of the employee’s base salary). 

In order to solve its own fiscal challenges and extend the solvency of the teacher retirement system, in 2014 the State of California began a six-year increase in the annual contribution rates for CalSTRS. CalPERS has ability to set its rates each year and has been increasing rates for the last 10 years . The table below reflects the rate increases enacted by CalSTRS and CalPERS:

The impact of these rate increases will be to add over $3 million to MPCSD’s annual budget from 2013-14 to 2020-21.

During the time that the District’s contribution rates are doubling (or more than doubling, in the case of CalSTRS), State and teacher contributions are going up as well. From 2013-14 to 2020-21, the State’s contribution is rising from 3.04% to 6.33%, and teachers’ contribution is rising from 8.00% to 10.25% (for employees hired before 2014; for those hired after 2014, the teacher contribution is going to 9.21%, and their benefits are also less than for those hired before 2014).

When enacted, the rates were not projected to continue increasing beyond 2020-21, when the growth in the District’s pension contribution costs would level off to the rate of salary growth.

However, in December 2016, CalPERS adjusted their long term investment rate of return from 7.5% to 7.0%. As a result, CalPERS will be increasing employer contributions rates above the levels set projected previously. The expected impact of this adjustment on MPCSD’s annual budget is to raise the classified employee pension cost by 5.8% of classified salaries in 2020-21.  Below are the rates for CalSTRS and projected rate changes for CalPERS.

Employer Rates of Contribution for CalSTRS and CalPERS

For more information about the changes in CalSTRS contributions, read this article from CalSTRS. For more information about CalPERS rate increase click to this link.

It’s important to note that California teachers do not pay into Social Security. Their only defined retirement benefit is their shared contribution to CalSTRS. Unlike local municipalities, police and firefighters, teachers and the districts that hire them are bound by state law regarding retirement benefits. Participation and rates cannot be negotiated or changed by the local school district.

How has enrollment changed in MPCSD since 2005?

Since 2005, MPCSD has experienced a 40% increase in student enrollment. Since passage of the expiring 2010 Measure C Parcel Tax, MPCSD has experienced an 18% increase in student enrollment. By 2025, it is anticipated that MPCSD will have added an additional 300+ students to the 3000 students we currently serve. As a community-funded district, MPCSD receives no meaningful additional funding when enrollment increases, unlike state-funded districts. The only way to meaningfully increase revenue in a community-funded district is to pass a parcel tax or seek donations.

Source: CDE and EPC Consultants

Was 2010’s Measure C Parcel Tax that is expiring intended to be temporary?

Measure C was initiated to address two challenges that faced MPCSD in 2009 and 2010, just after the global financial collapse. At the time of Measure C’s passage, the state had made deep cuts to MPCSD’s funding while indicating that funding would be restored as the economy improved. In addition, the professional demographer hired by MPCSD to map enrollment trends projected significant growth over the short term followed by a leveling off. Therefore, Measure C included a 7-year term, which was a different structure than all of MPCSD’s previous parcel taxes which were passed without a sunset. The 7-year term also served as a way for the district to assess its needs again as Measure C neared its sunset, and re-evaluate the district’s ongoing need - or lack thereof - for this parcel tax.

Now that it is 2016, the reassessment of the need for Measure C funding - or even increased funding - shows that the district actually has even more significant challenges than it did seven years ago. Rather than decline or even plateau, the District’s enrollment continues to increase beyond anticipated levels. Since the 2010 passage of Measure C, enrollment at Encinal, Laurel, Oak Knoll, and Hillview has risen over 18%. Enrollment in our district schools is projected to increase by at least 10% over the next eight years. Additionally, cuts the state made to schools during the national economic downturn have not been restored to districts like Menlo Park. Add to these factors the state-mandated increase in pension contributions that MPCSD must make, and it is clear that without a continuation and increase of the Measure C funds, the district would need to make devastating cuts to its staff and programs.

Are MPCSD teachers overpaid?

No. MPCSD operates in a professional labor market in which the demand for high-quality teachers is greater than the supply. When one accounts for the extraordinarily high cost of living in the Silicon Valley (particularly in Menlo Park) and considers that teachers are the single most important factor for every child achieving academic excellence, the answer, again, is NO. The district’s bottom line is simple: MPCSD pays what is necessary to attract and retain high quality teachers in an extremely competitive environment. Its salaries are comparable to neighboring, similar districts and its hiring practices and salary structure ensure that it can continue to deliver the overall highest possible quality of education to its students. Communities like Menlo Park demand high quality schools; teacher salaries, work environment, and professional support ensure that the district can continue to offer what the community demands.

Through the vision and hard work of Board members, administration, and an outstanding teaching and support staff over the last 20 years, MPCSD transformed itself from an average performing district to the world-class, top performing district it is today. It is a talent organization that not only pays to attract and retain extraordinary performers, but also to provide professional development experiences to team members that is second to none.

While MPCSD teacher salaries compare favorably to other districts statewide, in comparison to similar districts, nearby districts, MPCSD is not an outlier by any means. Using the six districts listed below as comparables and when comparing 2016-17 total compensation (salary + benefits) in each category, MPCSD ranks 3rd out of seven across four different experience and training levels of teachers.

* Comparable districts include the following San Mateo County school districts: Belmont-Redwood Shores, Hillsborough, Las Lomitas, Portola Valley, Woodside, and Palo Alto Unified.

It’s also important to note that MPCSD teachers work 189 days, the highest number of days of any comparable school district. This means that MPCSD teachers’ per diem salary is even less than the ranking for total compensation would suggest. It’s also instructive to note that in an environment with a much more diverse student body, MPCSD teachers achieve similar or even better results than comparable districts.

How and when are salaries negotiated in MPCSD?

Collective Bargaining for salaries and working conditions is state mandated for all public school districts. Balanced decisions that take into account a district’s needs and ability to pay, as well as an understanding of what the market demands, are a primary function of an elected school board informed by accurate and timely information prepared by district staff.

The district has a legal obligation to “bargain in good faith” with the recognized representatives unless the representatives waive their right to bargain. Outside of a waiver of the right to bargain, refusing to negotiate is an illegal, unfair labor practice that violates the state EERA law. The good faith bargaining obligation requires the district to consider and exchange proposals in an effort to reach agreement, even if the end result might be a zero salary increase.

MPCSD includes two collective bargaining units--certificated and classified.

• Certificated includes those employees that require a particular certificate or credential to serve in their position. While principals, superintendents, counselors, psychologists, etc. are all certificated, only teachers are part of the collective bargaining unit for certificated staff.
• Classified includes those employees that don’t require a special certificate (although specialized training is often necessary) to serve in their positions. While classified managers are all considered classified, only administrative assistants, custodians, grounds crew, bus drivers, aides, and IT staff are part of the collective bargaining unit for classified staff.

Historically, MPCSD has negotiated salaries with its two collective bargaining units on an annual basis. The units may bargain and ultimately agree on no salary increase; however, the expectation to bargain never ceases, and the timing of an agreement is also a function of the negotiation process.

Over the past decade, MPCSD teachers' negotiated salary increases have averaged 2.4% per year, about the same pace as inflation. Over the last two years, teachers received a total salary increase of 2.5%, or 1.25% per year. The board negotiates salaries based on competitive considerations -- what salaries are necessary to attract and retain high-quality teachers. In order to address the challenges of the tightening job market and to ensure the most accurate and timely information is provided both to the Board and to the public, the MPCSD Board is establishing a Compensation and Retention Committee.

Section 3: Reduction Considerations

What has MPCSD done so far to address the structural deficit?

For the 2016-17 school year, the district staff reduced spending or adjusted budget assumptions totalling just over $900,000. The reductions came from the following areas (amounts rounded):

Why is the district considering reductions in art, music, and library? Aren’t the specialists funded by the Menlo Park-Atherton Education Foundation?

It is and always has been true that the MPAEF makes it possible to have one full-time art teacher, multiple music teachers, and a full-time librarian at every site, in addition to a full-time performing arts teacher at the middle school. However, MPAEF donations don’t separately fund these positions. MPAEF makes an annual gift to the district, which is used as part of the district’s general operating budget. The district is able to focus a great deal of its non-MPAEF funding to hire and retain high quality teachers and provide low class size because it can depend on MPAEF’s annual gift of $3.6 million. Without it, our deficit would grow exponentially. Unfortunately, the cuts that make the most impact financially (due to their size) are music, art, and library, as well as class size. It’s the tragic mathematics of public education; when budgets tighten those programs that stay are what’s mandated. The only reductions available are those expenses that aren’t mandated — music, art, library, and class size.

Now more than ever, it’s essential that parents continue their generous giving to MPAEF to ensure that the deficit doesn’t grow by an additional $3.7 million annually (MPAEF’s 2016-17 commitment). Our Board and staff are working hard to devise a plan to save music, art, and library; we’ll need everyone’s help to do this, including a robustly supported MPAEF.

Does Menlo Park have too many administrators?

The district has included staffing reductions in administration in its preliminary recommendations for potential budget cuts. However, Menlo Park City School District already spends less money per student on administrators than any of its high-achieving peer districts. Based on 2014-15 data publicly available on EdData, when all administrators are included, MPCSD once again gets the most value for the money it spends.

 “Administrators” in MPCSD include all certificated and classified managers, all of whom lead vital work within the organization. Menlo Park City School District is not unique in the number and type of positions for a district its size with schools our size.

The graph below illustrates actual administration levels before and after the 2010 Parcel Tax, as well as current year figures and projections for next year. Based on increasing student enrollment, which increases administrative demand, our student to administrator ratios have stayed relatively consistent, within a 16 student range.

Section 4: Funding Options (including Parcel Tax)

If the District puts a parcel tax measure before the community, when would that happen?

The MPCSD Board of Trustees, including newly elected and seated trustees, voted by a 5-0 margin on December 5, 2016 to place a parcel tax on the March 2017 ballot in the amount of $360 expiring after 7 years. The Board had considered the various timing options outlined below and concluded that the March 2017 option was best for the community, largely because should it pass, there would be no need to give layoff notices to teachers. Months of public discussion preceded the vote, including the opinions of the newly elected board members. An organized committee of volunteers was ready and eager to start work on a campaign. These factors mitigated the challenges posed by the March 2017 timing and allowed the important benefits of this timing to outweigh any possible drawbacks.

How much would a parcel tax have to be to solve the current deficit?

The current projected budget deficit is $5.3 million for 2020-21 after the $900,000 reductions already assumed in the budget. In order to bridge that gap, MPCSD would have to cut $4.5 million out of its budget beginning in 2017-18 (the difference between the two numbers is a result of compounding savings over the five years). A parcel tax of $515 would close the gap except for the $900,000 already eliminated.

The 2010 Measure C Parcel Tax is currently valued at $207 per parcel (it increases by CPI each year). Any parcel tax increase reflected in the table below assumes a $207 renewal plus an increase. For example, the $515 option represents a renewal of the current $207 that taxpayers pay, plus a $308 increase.

After modeling many scenarios and considering input from a variety of stakeholders, the Board decided on a parcel tax of $360 with a 7 year term. If passed, this amount will give the district $2.85 million annually. The amount reached was a compromise between those wanting to see some cuts and tightened spending from the district and those wanting a significant increase that would allow for very few - if any - cuts in the near term. The $360 amount assumes the $900,000 already cut in the 2016-17 year will stay in place going forward, and an additional $1.25 million in cuts will need to be made over the next two years.

Will any option to address the Structural Deficit be a “permanent solution”?

No. Any potential plan to address the structural deficit with budget cuts and/or parcel taxes should NOT be viewed as a “permanent” solution. Why?

• Future economic conditions are impossible to predict accurately. MPCSD is subject to a variety of uncertainties, which may represent upside or downside from a financial standpoint. The most significant uncertainties are as follows:

• Property Tax Revenue Growth. Property taxes are the district’s largest funding source. It is both volatile and cyclical.
• Enrollment Growth.  Beyond the short term, demographic changes including movement in and out of the district as well as families’ preferences for public vs. private school are difficult to predict.
• Regulatory Changes.  As illustrated by Prop 13 and increasing pension costs, the district can be significantly impacted by political and regulatory decisions that are outside its control.

While these risks and opportunities exist at any point in time, they become more difficult to assess the further we attempt to look into the future. Beyond five years, any financial forecasts are subject to a high degree of uncertainty.

• Our budgets have almost no financial flexibility.  As explained elsewhere, MPCSD receives significantly lower property tax funding than comparably performing districts in San Mateo County. We deliver a quality of education that is comparable to those districts, but at a much lower cost per student. However, due to our property tax revenue disadvantage, we still require a relatively high parcel tax burden to do so. Because parcel taxes are effectively the “last dollar” raised (along with community donations), we are careful to size them to the lowest amount possible to deliver our vision for the school district.
  
• MPCSD needs the flexibility to reassess its funding needs in the future.  We, as a community, need to recognize that the district can’t know with certainty what economic conditions it will face several years from now. In the future, our funding needs may remain unchanged, go up, or go down. Unless we pad parcel taxes with significant additional dollars to cover future uncertainties, MPCSD has no alternative but to reassess its funding needs from time to time. By the same token, it would be irresponsible not to propose lower parcel taxes if financial conditions dramatically improved. We will endeavor to maintain open and direct communications with the community at all times, but at these junctures in particular we would expect to engage in a constructive dialogue with the community concerning the state of our schools and vision for the future, review new economic developments, and collectively determine the need, if any, for new parcel taxes (and in what amounts) and/or budget cuts.

With such high real estate values in Menlo Park, why is parcel tax funding even necessary for our schools?

Although the average home price in Menlo Park is worth well over $1 million and many residents pay tens of thousands of dollars in annual property taxes, property tax revenue covers about 60% of the cost of educating MPCSD students, with the balance coming from parcel taxes and other federal, state and local funding.

Not all property tax paid to San Mateo County goes to MPCSD schools. The county pays 43% of the property tax dollars it collects to school districts within the county. There are 25 school districts that receive funds. Of the total property tax paid out from the county, MPCSD receives 1.4% of that money.

A very small portion of our property taxes goes to fund MPCSD.  In Menlo Park, the school district receives only 18.6 cents of every dollar paid in property taxes (2016-17). To illustrate, the homeowner of a $2.5 million home writes a $25,000+ check each year to the county, but only about $4,650 of that reaches MPCSD schools.

Prop 13 significantly reduces potential property tax revenues. Due to Prop 13, the property tax base lags far behind recent home valuations. The average sale price of homes in Menlo Park is approximately $2.4 million. However, according to San Mateo County data, the average assessed parcel value within MPCSD’s boundaries is only about $1.7 million. The reason is that 60% of single-family homes within MPCSD’s boundaries have not been reassessed in over ten years, including 35% of all single-family homes that have not been reassessed in over 20 years, and the annual appreciation for these homes has been capped at 2% per year or less.

Parcel taxes are needed to fill the funding gap...  As a result of both the relatively small portion of property tax proceeds allocated to the district and the artificially low tax base due to Prop 13, property taxes generated about $9,025 in funding per student last school year. MPCSD’s average spending per student exceeded $14,225, a difference of about $5,200. Other federal, state and local sources (excluding parcel taxes) generated about $3,330 in funding per student, but that still leaves a gap that can only be filled with parcel taxes.

...Even though we spend less per pupil than comparably performing districts.  It is important to dispel the mistaken notion that MPCSD is using parcel taxes to deliver a “gold-plated” education or that the district is trying to match the per-pupil spend of neighboring districts. In actuality, MPCSD spends less -- and in some cases, far less -- per student than comparably performing districts. The table below illustrates how much each district receives and how much each spends on average across all students in the district.

For additional context, Menlo Park -- with its concentration of high incomes and relative wealth -- spends only ~20% more than the US nationwide average ($11,841 in 2013), and it spends far less than the average across the entire state of New York ($19,818 in 2013). We believe that we are extremely efficient in our use of taxpayer dollars and that we deliver far more value per dollar spent than our peers in similar communities.

Given the recent strength of the real estate market in Menlo Park, why doesn’t growth in property taxes meet the district’s funding needs?

It does seem counterintuitive that with such high property values and the recent boom in real estate prices, the district still faces a structural deficit. Indeed, MPCSD has benefited from rising home prices and expects this trend to continue. However, property taxes only account for one source of district funding. A large portion of district revenue does not experience such robust growth, and, overall, we expect that total revenue growth will be outpaced by total expense growth.

Property taxes have grown 6.1% annually.  Our forecasts (August 2016) assume property tax revenue growth consistent with recent historical trends. Over the past eight years, property tax revenue has grown at a compound annual growth rate of 6.1%. The district’s revenue projections assume that this will continue. We are also projecting incremental reductions to the growth rate starting in year 2020-21 to reflect a gradual slowdown that has been occurring over the past 15 years. The resulting 5-year revenue projection for secured property taxes is 5.6% growth per annum (2016-17 through 2021-22).*

Other funding sources are growing much more slowly (actually projected to shrink).  In 2016-17, property taxes represent about 60%  of total district funding. The remaining 40% of district revenues are either (a) one-time, not expected to continue beyond this year, or (2) largely driven by inflation and cost-of-living adjustments. In fact, as one-time revenues go away and Measure C expires, this 40% of revenue is projected to decline at a 0.6% annual rate (2016-17 through 2021-22).

So, even with robust property tax growth, total funding for the district is projected to grow at only 3.1% annually through 2021-22.  Again, this is because nearly half of the district’s revenues are projected to shrink over the next five years.

Consequently, revenue growth will lag behind expense growth.  Due to both enrollment increases and increasing pension costs (discussed here), MPCSD is facing unusually high annual increases in expenses while striving to deliver the same quality of education it currently provides. Expenses are projected to grow at 4.3% annually (2016-17 through 2021-22), or 1.2 percentage points faster than revenues.

*Note: For a detailed discussion of historical property tax growth and long range projections, please see the September 22, 2016 presentation to the Finance and Audit Committee (“Long Range Planning Model”). 

How much of my property tax bill goes to fund our schools?

San Mateo County pays 43% of the total property tax dollars it collects to all of the school districts within the county. There are 25 school districts that receive funds. Of the total property tax paid out from the county, MPCSD receives 1.4% of that money.

Within the boundaries of Menlo Park City School District, the District receives 18.6 cents of every dollar paid in property taxes. For 2016-17, MPCSD received $27.9M in funding from property taxes, which makes up almost 62% of the school district budget.

Is the property tax revenue projection a conservative estimate?

No; it is a reasonable estimate. On average, property values have grown 6.1% annually over the last eight years (see above). The housing market “feels” like it’s appreciating much faster, particularly when teardowns can turn a sub-million dollar property into a three- or four-million-dollar home. Here are two reasons for the disconnect:

• Only a tiny fraction of the tax base turns over each year. Over the past ten years, approximately 40% of the residential properties within the MPCSD have been reassessed at current market values. That’s equivalent to only ~4%  turnover in housing inventory per year. Because of Prop 13, in any given year the property value assessments on the other 96% of properties are limited to an inflation factor of 2% or less, dragging down the overall growth in property taxes.
  
• In the medium and long run, boom years are offset by bust years.  Recent years have seen average prices of home sales grow at over 10%, or even 15%, per year. However, over past 20+ years, Menlo Park real estate has suffered a downturn every 8-9 years, on average. In the last recession, home prices declined and property taxes experienced years of very low growth. We expect cyclical downturns to continue in the future. Therefore, despite experiencing higher growth in recent years, our forecasts reflect a “cycle-average” growth rate that is consistent with historical trends.

Can MPCSD tap into its budgetary reserves to address the structural deficit?

The reserves can not address a structural deficit because they are one time monies that ongoing expenses will deplete. Reserves can be used to protect schools by minimizing the impacts from unexpected imbalances on a short term basis only. Per Board Policy 3470 the uncertainty reserve should not be permitted to drop below 15% in any budget year or 10% in multiyear projections. Hence, the reserves can not address the structural deficit except in smoothing the impacts to the schools until a more permanent fix is in place.

The District currently maintains two reserve funds: the economic uncertainty fund in the General Fund; and Fund 17, which holds reserves from past parcel tax funds. The economic uncertainty fund does not include funds restricted or mandated for a specific purpose by external parties, constitutional provisions, or enabling legislation, nor does it include unrestricted assignments which are funds that are set aside with the intent to be used for a specific purpose by the School Board. Fund 17 is being intentionally and strategically drawn down and is expected to be fully expended by 2019-20. The draw-down is necessary to honor the commitment to taxpayers to ensure a healthy and necessary reserve level, but not an excessive one.

Current Reserve Levels:

The combined General Fund economic uncertainty and Fund 17 reserves are currently 25%. This level of reserves allows the District to strategically make expenditure reductions while minimizing the impact to students’ educational experience. By the end of 2016-17, the district will have approximately $10 million in available reserves, and by 2017-18 the reserve levels will approach 10% ($5.9 million). At the same time, next year's expenses will exceed revenues by $3.4 million; by 2021-22, expenses are projected to exceed revenues by $5.3 million. Over these years, the cumulative funding need is far greater than the reserves could support. Therefore, the District can only sustain two more years of deficit spending with current expenditures (see table below). A permanent solution that balances annual funding and expense levels is required by 2017-18 to ensure that the reserve level remains healthy.

MPCSD Long Range Financial Model IF Structural Deficit is Not Addressed

For more information about what is causing the District’s structural deficit, please see here.

How will the Passage of Prop 55 impact revenue in MPCSD?

Prop 55 continues the $200 per ADA for community-funded districts that was allocated under Prop 30.   (State-funded districts are allotted much more than that,  but the amount offsets State Aid;  thereby reducing the State's overall obligation for funding education.)  Our projection assumed that Prop 30 would be extended past 2018/19 when the temporary taxes would have expired.   We currently receive about $580K from this source.  Prop 55 does not result in additional funds under our long-range model.

What happened to the rental income that MPCSD used to receive?

The district owns 5 school campus properties. Until 2015, the smallest property known as the “O’Connor site” located in the Willows neighborhood, was leased to the private German American International School (now known as Alto International School). This lease brought in approximately $350,000 per year as income for MPCSD. As enrollment in the district has steadily increased, it became necessary to house MPCSD students on the Willows campus property. Therefore, the lease with the private school was ended in May 2015, at which time construction began on the property to build the new Laurel Upper Campus. The completion of Laurel Upper Campus in 2016 enables the district to house approximately 660 K-5 students this year between the Lower Campus and Upper Campuses with some room to grow as enrollment increases. The district does not own any additional property so there is no longer an income stream available from rental property. Click here for prior year revenues brought in from this site.

Neighboring community-funded districts, Palo Alto and Las Lomitas, enjoy sizable rental incomes from property still owned by their districts but leased to private schools and community organizations.

Section 5: Other Cost-Saving Ideas

What does research say about the correlation between school quality and home value? 

It may seem obvious by observation in the Menlo Park/Atherton and surrounding areas that high home prices and school quality are related, but there is also research dating back several decades that indicates this trend to be true. Charles Tiebout began studying the effects of high quality schools on home prices back in 1956 when he noted that local public goods (LPG), which include schools, are strong drivers of where individuals will choose to buy a house and they are willing to pay higher prices where their desired LPG quality exists. Research from various municipalities around the nation since then has confirmed the trend and added the following specific conclusions:

•  The quality of primary school education is positively correlated with house prices. The price premium remains substantially large, especially for houses associated with above-average schools (FRB St. Louis)
• The price premium parents must pay to buy a house in an area associated with a better school increases as school quality increases (FRB St. Louis)
• If all K-12 schools in an area are rated Average and Above, the value of homes is 19% higher in that area than those in areas with Below Average schools (Urban Economics)
• Even after controlling for omitted variables, it can be seen that better school quality, as shown by an increase in test scores, has a positive effect on housing prices (Urban Economics)
• On average, buyers pay $50 more per square foot for homes in top-rated school districts compared with homes served by average-rated schools. (Redfin/Washington Post)
•  $1.00 increase in per pupil state aid increases aggregate per pupil housing values by about $20.00, indicating that potential residents value education expenditure (Public School Review)
• There is no evidence that school districts are overspending, on net; and school spending in districts with wealthier residents may be more efficient (Public School Review)

Why don't we combine the three local school districts (MPCSD, Las Lomitas, Ravenswood) into one in order to reduce costs/redundancies?

This question has been asked for years by many people in many different contexts. It is true that the cities of Menlo Park and Atherton have a unique structure. There are actually five districts serving parts of Menlo Park and Atherton. They are: Ravenswood, Menlo Park City (us), Redwood City, Las Lomitas, and Sequoia Union High School.

The simple answer to the question of combining districts as a cost savings measure is: Even if the MPCSD community was interested in this occuring, MPCSD couldn’t make it happen alone. And, there is no proof that combining districts would actually save money.  Combining districts would require the coordination of many different agencies including all local school boards, all local collective bargaining units (unions), local elected officials, the San Mateo County Office of Education, and the California Department of Education. It’s not impossible; it is simply out of MPCSD’s ability to make it happen.

It is possible that combining the districts wouldn't actually save money. While counter-intuitive, the following factors could actually make combining districts a more costly gamble:

• As Community-Funded Districts, MPCSD and Las Lomitas keep all their local property tax revenue because property tax revenues are greater than the state guarantee. A combination of districts could move the new district below the “basic aid” threshold.
• As a State-Funded District with a large percentage of English Learners and students from low income backgrounds, Ravenswood receives a great deal of supplemental and concentration (education terms) funding above and beyond their base funding. Joining with two small “basic aid” districts could deny the new combined district millions of dollars in supplemental and concentration funding.
• Big districts require much larger infrastructure and administration to operate.
• Salaries of all employees would likely need to rise to the highest common denominator for all employees of the new combined district.

The bottom line is that a great deal more research would need to be done at a much higher level than our small district to determine if combining districts would prove to save money. Additionally, such an effort would take years to accomplish and wouldn’t address the current structural deficit. MPCSD stands ready to be an active partner with any and all entities who want to further research the issue.

Be assured that residents only "pay" for districts in which they reside; thus, if you live in MPCSD, your taxes only pay for MPCSD and the Sequoia Union High School District (Menlo-Atherton High School is not a part of MPCSD).

What is the cost to the district of allowing interdistrict transfers of children of MPCSD staff members?

Accurately measuring the cost of each student who enters a grade level can be a challenge. Over the medium to long run, the marginal costs are probably fairly close to the average cost for the education of each student ($14,294 in 2014-15). In the short term, however, the marginal costs are probably much lower; it all depends on the actions the district would to take were the children no longer attending MPCSD schools. In other words, how much cost would the district actually avoid if children of staff were to leave?

Currently, there are 67 children of teachers/staff, who do not live within the district, attending MPCSD. These 67 students are less than 2% of the district’s total enrollment. While the highest number the district has served in recent years, the number fluctuates from year to year, while the percentage of total enrollment has stayed between 1% and 2% over the last 10 years.

Most school districts, MPCSD included, determine staffing and other resource allocation based on enrollment. There are a few ways one could look at costs; in the short term, the costs are probably much less than the $14,000 average. On the low end, one could consider 67 students as necessitating three (3) classroom teachers. At an estimated cost of $130,000 (the average expense for one teacher in MPCSD), the total expense would be $390,000. In the medium to long-term, however, the district would adjust its staffing and resource allocation for the lower student enrollment, thus increasing the cost savings over time. Since the 67 students are spread out among all four schools in all nine grade levels and across all teachers, determining the costs of serving the 67 students is inexact. It is fair to say that the actual cost is actually somewhere between $390,000 and $957,698, and over time, the costs are closer to the $957,698.

Regardless, there is no arguing the “value” of an MPCSD education. Our teachers and classified staff who don’t live in the district are grateful for the opportunity to send their children to our schools. Bringing their children to MPCSD schools benefits the entire community in the following ways:

• The recruitment and retention of highly qualified staff.
• Decreased attrition of experienced staff; greater longevity of highly trained, veteran teachers.
• Staff devote more time to all students before and after school because their own children attend the same schools.
• Staff feel a greater sense of ownership for the quality of program and service.
• Staff bring students with a diversity of backgrounds.

The benefits to the staff include:

• A greater sense of belonging to the community they serve.
• Feeling valued and appreciated for the work they do.
• Increased health and wellness.
• Greater housing opportunities. They can live in more affordable communities without fear of having to send their children to below-average schools.
• More time to focus on their jobs and the children they serve.

Interdistrict transfer agreements for staff members is common practice throughout California. Every neighboring district has similar, sometimes even more generous, policies allowing for staff to bring their children to the schools in which they work. Some school districts, like Sequoia Union High School District, even allow children of staff of their partner districts (K-8 districts whose students matriculate into high school districts) to attend their schools. The MPCSD Board reviewed the policy on October 18, 2016 and directed staff to continue to monitor and annually report publicly the number of interdistrict transfers.

If I just want to understand the high-level summary of the Pension challenges facing MPCSD, what do I need to know?

• MPCSD is mandated by the state to participate in CalSTRS and CalPERS, two state-managed and state-administered pension programs.
• The $32.7 million net pension liability that appears on MPCSD’s balance sheet (2014-15 Audit Report) is simply a reporting requirement. The liability belongs to the state of California, not MPCSD.
• In 2013 the state passed the Public Employees Pension Reform Act, which reduced benefits for employees hired after January 1, 2013. Further, the state implemented a plan in 2014 to fully fund CalSTRS and bring the net pension liability to $0 over a 30-year time frame. This plan mandates the increasing pension contributions that are, in part, driving MPCSD’s structural deficit.
• The current parcel tax and/or budget reduction actions that MPCSD is currently considering will address these rising pension contribution rates.
• Managing payroll growth is the District’s only lever for controlling pension costs. MPCSD will continue to manage payroll as efficiently as possible and is considering all options to slow its growth. However, the District is committed to offering competitive pay in order to recruit and maintain the high quality educators who are critical to delivering the high quality educational services that our community expects.
• Potential risks around the state’s pension funding plan include higher district contributions beyond the levels currently mandated through 2021/22. However, these risks are uncertain, difficult to quantify, and -- at a minimum -- more than five years away.
• The best and most important action that MPCSD can take to address the STRS/PERS unfunded pension liability is to have a multi-year financial plan in place that (1) has adequate funding to cover projected expenses, including rising pension costs, and (2) builds and maintains an adequate reserve that provides the District with enough short-term flexibility to react to any adverse financial events. MPCSD believes that any other actions the District could take addressing future pension contribution risks would be ineffective and likely detrimental to the quality of our educational services.

How are pensions determined and managed in Menlo Park City School District?

Like every other public school district in California, MPCSD is required by state law to participate in two multi-billion-dollar, state-managed pension programs:

1. California State Teachers’ Retirement System (CalSTRS, or STRS), which provides retirement benefits for teachers.
2. California Public Employees’ Retirement System (CalPERS, or PERS), which provides retirement benefits for non-teaching and non-certificated employees.

Although CalPERS is the larger of the two California public agencies, CalSTRS covers the vast majority of MPCSD employees and has a significantly larger financial impact on the district than CalPERS. In general, this discussion will highlight data and draw examples from CalSTRS, but the trends and implications apply to both pension programs, unless otherwise noted.^[1]

CalSTRS and CalPERS are state-mandated, state-managed, and state-administered programs. This means:

• MPCSD is required by law to participate in these pension programs.
• The state of California establishes retirement benefits packages through legislation.
• To fund the programs, the state mandates the annual contribution levels paid by the state (from its general funds), employers (such as school districts and community colleges), and employees. Contribution rates are set as percentages of payroll/salaries.
• The state manages and invests the funds’ assets.
• The state pays out retirement benefits from the funds’ assets.
• The state is responsible for maintaining the programs’ financial viability. Any “unfunded liabilities” are the legal responsibility of the state.

MPCSD has almost no influence over these pension programs. It determines neither benefits packages nor contribution rates. It does not pay out benefits and is not responsible for keeping the programs adequately funded.

The one lever MPCSD controls is payroll. Since annual STRS/PERS contributions are set as a percent of payroll, the District’s salary schedule (together with contribution rates set by the state) drives its annual pension costs. However, MPCSD’s salary options are constrained by supply-and-demand economics. They are impacted by such considerations as: the statewide teacher shortage, compensation packages offered by comparable nearby districts, and this area’s cost of living.

One of the District’s fundamental beliefs is that great educators are the key to providing a great education. They are the ones responsible for delivering the high quality services that our children deserve. They are the engine of innovation and continual improvement to we expect in our school district. And in MPCSD they do it with less support and fewer resources (i.e., at a lower cost per student) than teachers in comparably performing nearby school districts. The District believes that, with its current salary schedule, the community is receiving an outstanding “return on its investment.”

MPCSD is committed to maintaining, and ultimately improving upon, the high quality education it currently provides, and we believe that one essential ingredient is offering competitive pay relative to comparably performing districts in our area. To offer a salary below what is necessary to attract and retain the best teachers, to purposefully let our teachers’ salaries fall out of line with other top performing districts puts at risk every element of the high-quality education we currently provide.

That is not to say that the District refuses to look at compensation as an opportunity for cost control -- on the contrary, compensation growth is being actively evaluated along with many other alternatives. What this means is that, as the District considers cost savings from compensation, the community is fully cognizant of the risks and costs associated with those savings.

What is the amount of the unfunded pension liability?

In its financial statements for the period ending June 30, 2015, the District reported a net pension liability of $32.7 million, including $28.1 million related to CalSTRS and $4.6 million related to CalPERS. It is important to note that:

• Even though this line item appears on the District’s balance sheet, this liability belongs to the state of California, not MPCSD.
• The “net pension liability” is an accounting convention that does not yet reflect the 2014 Funding Plan that was passed by the state legislature to address the CalSTRS and CalPERS unfunded liabilities.

What does “net pension liability” mean? Net pension liability is an accounting standard that calculates the difference between the total assets and total obligations of a plan:

• Total assets: all funds held to pay current benefits and invested to cover future benefits
• Total obligations: all the benefits already earned by employees and retirees

If assets exceed obligations, the program is “fully funded.” If obligations exceed assets, there is a “net pension liability.” CalSTRS unfunded liability is estimated to be approximately $70 billion.

If STRS/PERS are state-managed, why does MPCSD’s balance sheet show a net pension liability? The short answer is that this is the accounting convention mandated by the Governmental Accounting Standards Board (GASB). While ultimate financial responsibility for the plans rests with the state, the programs are funded by contributions from three sources: state general funds, employers (e.g., school districts), and employees (e.g., teachers). Governmental accounting changes (GASB Statements 68 and 71), effective in the 2014/15 fiscal year, require that state and local public entities report their proportionate share of unfunded pension liabilities in their financial statements, rather than continue having the pension plans report the entire amount. MPCSD’s “share” of net pension liabilities is determined by its annual STRS/PERS contributions relative to the contributions of all participating school districts and the state.

All California school districts report a net pension liability on their financial statements. Each district’s net pension liability is roughly proportional to its payroll. For example in 2014-15, net pension liabilities for comparably performing school districts were as follows (approximate enrollment in parentheses):^[2]

• MPCSD: $32.7 million (3,000 students)
• Palo Alto Unified: $147.3 million (12,500 students)
• Hillsborough: $18.6 million (1,500 students)
• Las Lomitas: $15.5 million (1,400 students)

All school districts participate in the same pension plans. These numbers merely reflect each district’s proportional participation in CalSTRS and CalPERS. No district’s pensions are better or worse funded than others.

The reported net pension liability does not yet reflect the state’s current plan to fully fund CalSTRS and CalPERS. Net pension liability is an actuarial convention for quantifying the net assets of a pension plan. It is a point-in-time snapshot that compares only current plan assets against benefits earned to date. It does not take into account future plan contributions, nor does it quantify future benefits that may be earned by current and future employees. This point is particularly relevant for STRS/PERS now. The state of California recently enacted legislation to significantly increase annual STRS/PERS contributions from state funds, school districts, and employees. This is intended to shift the funding/expense balance from the past, when STRS/PERS were underfunded, to a situation where they are “overfunded” on an annual basis in order to fully fund STRS/PERS over a long timeframe. These mandated increases in funding are not yet reflected in the net pension liability amount. (See discussion below.)

What is the current plan to eliminate the unfunded pension liability?

As many community members are aware, one of the main reasons for MPCSD’s structural deficit is increasing pension costs. These increasing costs are a direct result of the state’s plan to eliminate the unfunded pension liability. Menlo Park’s plan is, by default, the state’s plan.

The CalSTRS 2014 Funding Plan nearly doubles annual contribution rates in order to fully fund CalSTRS and set it on a sustainable course. CalSTRS has been in existence for over 100 years, and it has historically been underfunded. After decade-long efforts to fill the gap, lawmakers took two important actions. First, the state reformed pensions in 2013 to reduce benefits for employees hired after January 1, 2013 (prior benefit levels were grandfathered in for all employees hired prior to that date). Second, and more significantly, lawmakers successfully included a plan to fully fund CalSTRS as part of California’s 2014-15 Budget Package. The CalSTRS 2014 Funding Plan mandates significant contribution rate increases across all sources of funding -- teachers, school districts, and the state. Prior to 2014, annual CalSTRs funding from all sources totaled approximately 19.3% of total teacher payroll. The 2014 Funding Plan established a schedule to nearly double that funding rate over time, to approximately 38.2% by 2021. (Employer, or district, rates were raised from 8.25% to 19.1% over seven years, teachers’ contribution rates were raised from 8% to 10.25% over three years, and the state’s rates were raised from 3% to 8.8% over three years.)

This funding plan is projected to remain in place for over thirty years -- permanent, for all intents and purposes. Prior to the 2014 Funding Plan, CalSTRS had expected to fully exhaust its assets by the mid-2040s. After the Funding Plan, it projected itself to be fully funded in that same timeframe.

The benefit of the CalSTRS 2014 Funding Plan is not yet reflected in the actuarial net pension liability calculation -- this will only gradually appear in financial statements over the next 30+ years. Even with the dramatic increase in contribution rates (which are not yet fully realized) and even if all actuarial assumptions prove true, CalSTRS does not expect to be fully funded for another 30+ years. Because the net pension liability calculation is a moment-in-time historical snapshot, it only captures the impact of the plan to date and does not reflect the 30+ years of “overfunding” that the plan mandates in order to eliminate the unfunded pension liability. Additionally, the net pension liability calculation has a two-year lag, so the most recently available financial statements from 2014/15 compare pension assets and liabilities from 2013 -- prior to any contribution increases taking effect.

What are the risks to the CalSTRS 2014 Funding Plan and, as a consequence, what are the risks to MPCSD?

There are several potential reasons why the CalSTRS Funding Plan may fail to meet its financial targets:

• Investment returns lower than projected. To meet Plan projections, CalSTRS assumes that its investment portfolio will generate a 7.6% annual rate of return. This is consistent with the fund’s historical performance, but many critics believe that it is too optimistic a forecast. This is quite possibly true, and it represents the primary risk factor for CalSTRS’s financial sustainability.
  
  However, it is important to note that the current legislation structures the funding ratios between the state, districts, and teachers in a highly complex manner in which the state receives the lion’s share of investment outperformance and bears the vast majority of liabilities resulting from investment underperformance. Because district rates are currently bound by a floor of 8.25% and ceiling of 20.25%, district costs are more certain than state costs when considering variability in investment performance.
  
• The state could retroactively award a better benefits package to current and retired employees. This seems unlikely given the current fiscal climate and the general recognition that past such actions have contributed to CalSTRS’s current challenges.
  
• Actuarial or other forecast assumptions could be wrong. Expected age of retirement could be wrong, or mortality rates could differ from projections. Inflation and/or wage growth could vary from projections.

If the 2014 Funding Plan fails to fully address CalSTRS’s unfunded liability, the state has very few potential levers to pull. All would require new legislation:

• Draw more from the state’s general funds
• Raise the contribution rates of employees and/or employers
• Reform/cut the benefits package (more challenging for current employees and retirees, less challenging for future employees; already done once in 2013)

Under any circumstance, potential adverse consequences for MPCSD are unlikely to be realized until after 2021 at the earliest. If the 2014 Funding Plan fails to achieve its targets, the primary risk to MPCSD is that the state passes new legislation that increases employers’ contribution rates beyond the level set by the current schedule. Because rate increases have already been mandated through 2021, any potential further increases are highly unlikely to take place until after 2021. In fact, CalSTRS has already amended its policy once in November 2015 to hold district contribution rates at higher levels after 2021 (20.25% of payroll) in scenarios where investments underperform projections.

Furthermore, year-to-year investment performance is highly unpredictable, so it would likely take several years before the state could even determine whether long-term investment performance is meeting expectations, and, consequently, whether changes in the Funding Plan are required.

What can the District do to address the unfunded pension liability?

MPCSD cannot unilaterally take further action to resolve the unfunded pension liability. Unlike some cities, counties, and states across the US who are wrestling with their own underfunded public pensions, MPCSD cannot renegotiate pension benefits packages. It cannot raise the level of annual contributions. It cannot alter the fund’s investment strategy. The only lever the District has is to set payroll, but as previously stated, high-quality teachers are the key to delivering everything to which MPCSD aspires. Offering competitive pay is critical. Therefore, while it may not be obvious, there is a real cost to our students’ experience that comes with slowing compensation growth.

Just as no individual taxpayer can eliminate the federal government’s debt, no single school district has either the financial resources or the legal authority to eliminate CalSTRS and CalPERS unfunded pension liabilities. That power and responsibility rests with the state alone, and the state has implemented the 2014 Funding Plan for that purpose.

If community members feel strongly that underfunded public teachers pensions are an important policy problem, then the appropriate venue for addressing those concerns is the California state legislature. There is no alternative venue that can have a meaningful impact on pension fund solvency. To state the obvious, changing school district budgets has zero impact on pension fund solvency.

The best and most important action that MPCSD can take to address the STRS/PERS unfunded pension liability is to have a multi-year financial plan in place that (1) has adequate funding to cover all projected expenses, taking into account rising pension costs, and (2) builds and maintains an adequate reserve that provides the District with enough short-term flexibility to react to adverse financial events. Measures A and C would have addressed that need. Similarly, current consideration of a potential parcel tax and/or budget cuts is in direct response to a structural deficit that is, in part, a result of these rising pension costs.

What if the 2014 Funding Plan is inadequate? Can the District guard against further risk?

The District recognizes that the 2014 Funding Plan may not fully address the unfunded pension liability, and that this may result in increasing financial burdens to the District in the future.

However, this risk to the District is (1) uncertain, (2) difficult to quantify, and (3) long-dated (i.e., most likely beyond 2021). Therefore, any attempt by MPCSD to “budget” for this uncertain, unquantifiable, and distant risk today (e.g., through additional reserves) would be a fool’s errand. It would be similar to attempting to “budget” today for potential enrollment growth 5-10 years out, or a potential sustained decline in real estate prices (or recession) at some point in the future, or any number of potential financial risks to the District in the future -- beyond the reserve policy that is currently in place.

MPCSD already spends less per student than comparable, neighboring high-performing districts. We do this by offering competitive pay (compared to those high-performing districts nearby) and a great teaching environment; because we are able to attract the best teachers, we are able to deliver outstanding student performance with a lower dollar investment (per student) than those comparable districts. There are no “excess funds” from which the District can draw to reserve against this risk. Any reduction in the budget -- class size, electives, teacher compensation -- will have a direct impact on the quality of education for our children. Therefore, asking the District to somehow “budget” for additional future pension risk implies two equally unattractive alternatives (or some combination of the two):

1. Cutting educational services today to preserve the community’s “funding capacity” to address the potential risk of additional pension costs in the future, which may never come to pass
2. Collecting more parcel taxes today than needed to fund the District’s projected expenditures in order to build up a separate reserve, which, in the event of rising pension costs in the future, may meet short-term needs (but not ongoing funding imbalances)

Either action would be unnecessary and likely ineffective. One could argue that pursuing either path would be irresponsible in light of the District’s duty to educate our children to the best of its ability (alternative #1) and to efficiently deploy taxpayer funds (alternative #2).

MPCSD maintains the view that it is currently pursuing the best strategy for addressing the unfunded pension liability. This strategy has three primary components:

1. Develop multi-year plans that adequately fund all expenses, taking into account all known increases in pension costs as mandated by the 2014 Funding Plan.
2. Build and maintain adequate reserves to provide the time and flexibility to judiciously react to unforeseen events, including additional future increases in pension costs.
3. In the event that additional increases in pension contributions are legislated, new multi-year plans will necessarily consider budget cuts and/or new parcel taxes to accommodate those new challenges as soon as they materialize.