CLEO News

If Cities Are in Financial Crisis, Why Aren't They Panicking?

Most California school districts and their labor unions have finally come to terms on COVID-19 protocols, reconciling federal and state funding and mandate issues with the funding given them in several relief packages. Now, a new round of labor unrest is percolating across the state as new compensation contracts are negotiated.

Teachers expect sizable raises, citing past adjustments that have not kept pace with local inflation rates and expected future inflation. Meanwhile, most school districts were bracing for several years of steadily declining enrollment just as the pandemic set in. Because fixed costs and administrative overhead hinder a district’s ability to shrink its way to financial stability, many districts were counting on continued economic growth at the state level to orchestrate a soft financial landing.

Instead, the pandemic exacerbated the decline of enrollment (under 6 million for the first time in two decades and a level not expected until the mid-2020s) and challenged the state’s prospects for mid-term economic growth. Now, structural imbalances in school budgets – generated by the enrollment-based revenue dips coupled with inflationary pressures on the expense side (e.g., energy and utility costs) – are eroding financial reserve balances.

On the pension front, relief provided from the state’s 2020/21 budget is set to expire, and no additional pension relief has been proposed. Employer pension contribution rates have been creeping up over the past several years throughout the public sector. This trend is unlikely to stop, particularly in an inflationary environment that is generating higher retiree pension payments.

No one likes labor unrest: Administrators, teachers, students, and parents all suffer. School board members do not get elected on platforms of union busting or by taking an unrealistic stance on public sector compensation. Nor do they enter office well versed in the complexity and precariousness of the school funding model, unfunded liabilities in pensions and retiree medical benefits, bonded debt, deferred maintenance, depreciation, etc.

Even when negotiations are going well, both management and labor must keep an eye on how their actions would play out if talks were to break down and they were forced into mediation – or a Public Employee Relations Board hearing. At the same time, union leaders need to show their membership that the union is earning its dues, and school administrators need to demonstrate their professional commitment to sound financial management. All of these factors conspire to make labor talks more troublesome than one might expect.

The labor unions frame their compensation demands as “an investment in the students,” downplaying the impact on the district’s financial stability. The fact is that employee compensation is an expense, not an investment. Further, school districts cannot provide high quality educational services to students when they negotiate themselves into year-to-year survival mode in the face of declining enrollment.

When I was involved in similar labor discussions, I watched my analysis of organizational affordability calculated at the beginning of the negotiations abandoned in favor of doing almost anything to stop the pain of protracted labor conflict. Everyone at the table grows tired. Labor negotiators then feel greater pressure to conclude the negotiations than to salvage the original vision of achieving affordable terms.

If school districts across the State do not successfully negotiate moderate salary adjustments, future salary discussions will be even more contentious. Board members will have smaller reserves and fewer one-time resources to deliver stable educational services. Further, the per pupil cost of public sector education, which already exceeds that of comparable private institutions, will continue to escalate.

Parents – and teachers – should rethink what it means to “invest in the students.”

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Mark Moses has thirty years of experience in local government administration and finance. He is the author of The Municipal Financial Crisis – A Framework for Understanding and Fixing Government Budgeting (Palgrave Macmillan, January 2022).

California Local Elected Officials (CLEO) is a membership organization that networks, educates, supports and advises local elected officials throughout California’s thousands of cities, counties, school and special districts. CLEO offers policy guidance, detailed financial analyses, legal perspectives and communications assistance to our members on principled governance. Find out more at Calelecteds.org.




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