Tuesday, May 30, 2006

 

Financial Condition Analysis of SMSD

The Shawnee Mission School District (SMSD) is stable and prosperous. The district is highly successful in accomplishing its mission, and enjoys overwhelming support from the population it serves. The success of the district and the support it receives translates into taxpayer willingness to fund the district. The district has won every election for bond issues and tax increases since 1981. Residents strongly support bond issues to finance capital projects for the district. A bond issue passed in 1994 with a two-thirds approval margin. A similar issued passed again in 2004, with a similar margin.[1]

The district is located in Johnson County, Kansas. The county is generally recognized as the source of economic growth in Kansas.[2] Population in the county grew every year since at least 1980, from 270,269 to 2005's estimated 506,562.[3] However, despite county-wide growth, the district has seen declining enrollment for the last few years.[4] The assessed valuation in the county has also risen steadily, from $2718.9 million in 1992 to $6160.2 million in 2002.[5] The total assessed valuation of real property in the district was $2883.2 million for 2004,[6] an increase of $167 million from 2003.[7] The county's average job growth rate of 4.2% compares well with 2.0% for the metropolitan region and 1.8% for the nation.[8]

The table below was compiled using statistics from Standard and Poor's "School Matters"[9] and from the Kansas State Board of Education.[10] The three districts are the largest in terms of enrollment in Johnson County.
Performance Measures
District Reading Math Students Enrollment %Econ.
/Entity Prof. Prof. per Teacher Disadvan.
Shawnee Mission 81.5 75.3 16 29,389 14.2
Olathe 80.6 82.5 14.5 22,794 13.2
Blue Valley 82.7 80.6 15.5 18,906 2.7
Statewide 69.5 64.6 14 441,867 37.4

The table shows the district succeeds in its mission of education, ranking significantly above the average for Kansas as a whole. The percentage enrollment of economically disadvantaged students, a rough measure of the overall economic well being of the district, is the highest of the three compared in the county, indicating Shawnee Mission is not quite as wealthy as the nearby districts of comparable size. Yet the proficiency ratings of all three schools compare favorably. The success of the district is critical to continued support from the taxpayers.

The independent auditors, Lowenthal, Singleton, Webb and Wilson said the Comprehensive Annual Financial Reporting (CAFR) for the fiscal year ending June 30, 2005, was correct in all material aspects.[11] This echoed the letter from the 2003 CAFR, which was worded virtually the same way.[12]

The Government Finance Officers Association (GFOA) awarded the district Certificates of Achievement for Excellence in Financial Reporting for 2002 and again for 2004.[13] The Association of School Board Officials awarded its Certificate of Excellence in Financial Reporting, also for the years 2002 and 2004.[14]

The 2005 Management Discussion and Analysis (MD&A) portion of the CAFR noted that revenues exceeded expenditures, leaving a fund balance of $179.5 million. The fund balance includes a $68.1 million excess in revenue over expenses for the capitol fund, due primarily to the $65 million bond issuance. This issuance was in May, 2005, right before the close of the taxable year.[15] The comparable figure for the 2003 FY was $92.8 million, which represented an increase of $0.9 million from the preceding FY (2002).[16] Subtracting the $68.1 million attributed to the bond issuance in 2005 would leave a fund balance of $111.4 million. This represents healthy growth over the last few years.

The independent auditors also reported the district to be in compliance with the requirements of OMB Circular A-133.[17]

The CAFR was released October 3, 2005, which is significantly less than the six month time frame required to meet standards of good financial reporting.

The table below shows some commonly used financial ratios, the figures were derived from the 2003 and 2005 CAFRs.
Financial Ratios
Indicator 2003 2005
Current Ratio 9.364 5.729
Quick
Ratio
3.353 1.314
Days Cash on Hand 47.31 144.38
Debt
Ratio
.385 .537
Debt/Equity Ratio .626 1.161
(Current Ratio equals current assets divided by current liabilities; Quick Ratio equals cash plus cash equivalents divided by current liabilities; Debt Ratio equals total liability divided by total assets; Debt/Equity Ratio equals total liability divided by net assets.)

The ratios reflect the effects of the bond issuance. The current ratio declined significantly, which is consistent with undertaking a significant increase in liabilities. The quick ratio also declined. The days of cash on hand reflects the influx of cash at the end of the fiscal year, primarily from the bond sales. The debt ratio also rose, as did the debt to equity ratio. Since the bonds sold at the very end of FY 05, the financial ratios for that year are atypical.

A standard text states the common ratio should be approximately 2 and the quick ratio about 1.[18] The change from FY 03 to FY 05, then, would bring the district closer to the norm.

For Shawnee Mission, the key question appears to be how large is the untapped reservoir of financial capacity. The per capita debt increased significantly in 2005, to $1,073 from $613 in 2003. Since the school district's primary source of revenue is from real estate taxes, a ratio comparing assessed valuation to debt might be useful. The estimated assessed valuation for FY 2006 is $2,971 million; the bonded debt is $224 million.[19] Dividing the bonded debt by the assessed valuation and multiplying by 100, the debt represents 7.55% of the valuation of the district. To benchmark this figure, similar calculations yielded 14.5% for Blue Valley[20] and for Olathe, 17.12%. This suggests the Shawnee Mission School District retains substantial capacity to issue additional bonds, as the debt to valuation ratio is low.

The tax burden the district imposes on taxpayers declined significantly in the ten year period ending with 2004. For 1995, the total tax rate was $61.779 per thousand of assessed valuation. By 2004, that figure had dropped to $42.655 per thousand.[21] This also suggests unused capacity to raise revenue.

Public school financing in Kansas is capped by the state. The state currently uses a formula based on a dollar amount per pupil (BSAPP).[22] This led to problems in districts with declining enrollments, notably Shawnee Mission. Accordingly, a special adjustment for declining enrollments was passed for 2005.[23] This may enhance the district's revenues in the future, but implementation was stayed by an order of the Kansas State Supreme Court issued June 3rd, 2005.[24]

The Supreme Court of Kansas found the funding formula had not kept up with inflation, and ordered the Legislature to add additional funding to schools. The court retained jurisdiction of the case, and reserved the right to act in the future.

Since the state limits the operating budgets of the school districts, significant uncertainty in the budgeting process has been introduced. For example, districts do not hire for the following school year until after the legislature approves the funding package.[25]

Current pressures on the state budget may ease, however, with a reevaluation of projected revenues for the coming year. An additional $289 million over the next two years[26] will cover at least part of the additional funding mandated by the state.

A study published by the Kansas Policy Review found that various adjustments to the funding formula over the years since 1992 had the effect of discriminating in favor of certain school districts.[27] It appears likely that any new funding formulas will be cost based.[28]

According to the district's finance director, Mr. Tim Rooney[29], plans presently under consideration will add approximately $7 million in revenue for the district. Thus it appears that, despite the current controversy in Kansas over school funding, the district will not lose any ground.

So long as the district continues to deliver high quality education, it will maintain the support of the population it serves. With continuing popular support, the district will be able to tap unused revenue capacity to the limits allowed by the state. This excess capacity results in a positive long-term outlook for the district.

In addition, change to a cost-based formula for capping the budget, rather than a per-pupil reimbursement, will ease concerns that declining enrollments will result in declining revenues without proportionate declines in fixed costs. As noted by The Kansas Policy Review,[30] some form of cost-based funding appears likely in the near future.

Moody's Investor's Services has rated Shawnee Mission School District at Aa1 since 1990.[31] When considering the broad economic, political, social and demographic factors as well as the purely financial indicators, it appears likely the district will retain this rating for years to come.

[1]This and other indicators of voter support taken from historical data provided by the county election commissioners http://www.jocoelection.org/History/HistoryofSchoolDistricts-JCCC.htm#ShawneeMission
[2] "A Brief Economic History of Kansas" Hall, A. and Orazem, P., August, 2005: http://www.kansasinc.org/pubs/working/Brief%20History--Exec%20Summary.pdf
[3] Data from U.S. Census http://www.census.gov/ and County Economic Data Survey (EDS) http://www.ku.edu/pri/ksdata/kcced/profiles/pdf/20091.pdf
[4] Comprehensive Annual Financial Report, 2005: http://www.smsd.org/custom/budgetfinance/CAFR/FY05CAFR.pdf
[5] Op. Cit.p.3.
[6] 2005 CAFR p. 31.
[7] Comprehensive Annual Financial Report, 2003, page 31. : http://www.smsd.org/custom/budgetfinance/CAFR/2003.pdf
[8] Profile of Johnson County from the Johnson County Community College http://www.jccc.net/home/depts/6111/site/profile
[9] http://www.schoolmatters.com/
[10]
[11] Pages 20-21 at: http://www.smsd.org/custom/budgetfinance/CAFR/FY05CAFR.pdf
[12] Pages 18-19 at: http://www.smsd.org/custom/budgetfinance/CAFR/2003.pdf
[13] Page 15 at: http://www.smsd.org/custom/budgetfinance/CAFR/2003.pdf
and page 16 at: http://www.smsd.org/custom/budgetfinance/CAFR/FY05CAFR.pdf
[14] Page 15 at: http://www.smsd.org/custom/budgetfinance/CAFR/FY05CAFR.pdf and page 14 at http://www.smsd.org/custom/budgetfinance/CAFR/FY05CAFR.pdf
[15] 2005 CAFR, p. 10
[16] 2003 CAFR, p. 7
[17] Page 116: http://www.smsd.org/custom/budgetfinance/CAFR/FY05CAFR.pdf

[18] Financial Management for Public, Health, and Not-for-Profit Organizations, Finkler, S. 2005. p. 527.
[19] Source: "Budget Profile 2005-2006" p. 25: http://www.ksde.org/budget/d0512pi6.pdf
[20] Source: "Budget Profile 2005-2006" p. 25: http://www.ksde.org/budget/d0233pi6.pdf
[21] 2005 CAFR, table 5.
[22] "Current Kansas School Finance Formula": http://www.bluevalleyk12.org/SupportServices/downloads/
understandingschoolfinance.pdf

[23] Ibid.
[24] Summary of Montoy v. State : http://www.kscourts.org/kscases/ojasumm/2005/20050603-92032.htm
[25] "Schools can't hire till state sets budget," The Wichita Eagle, April 17, 2006. http://www.kansas.com/mld/eagle/
living/education/14358118.htm

[26] Kansas budget healthier than lawmakers previously thought 49News, April 17, 2006.: http://www.49abcnews.com/news/2006/apr/17/
kansas_budget_healthier_lawmakers_previously_thoug/

[27] What will it Take to Make Kansas School Funding "Cost Based"? Kansas Policy Review Vol. 27, No.2., fall 2005: http://www.ku.edu/pri/publicat/
kpr/kprV27N2/kprV27N2A3.shtml

[28] Ibid
[29] Discussed with me in e-mail correspondence.
[30] OP. cit..
[31] Ibid

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