K-12 Funding and Non-Traditional School Options

Vouchers, charter schools, increased homestead tax exemption, among others, are causing serious strains for school districts across Texas on both the funding and operating side.  How are SDs looking to adapt?

Transcription:

Steven J. Bassett (00:09):

Hey. All right guys, you ready? We'll go and just jump right in here. So ladies, and we're going to focus on the issuers quite a bit on here, but ladies, you're in a room full of bond professionals and people will be trickling in. As CFOs, what percent of your time is actually spent on debt management?

Jennifer Land (00:33):

I'm in a room,

Steven J. Bassett (00:34):

Jennifer,

Jennifer Land (00:35):

Of bond focused professionals, and I hate to admit this.

(00:41):

But it really is about 5% of time. But as much as I don't like to admit that I can say that because I work with a really specialized and trusted group of financial advisors and individuals who help support the school districts with our bonds and our debt management, I'm able to do that. Right now, my role is more strategic and I'm focused on the budget forecasting and the planning aspect. And bonds do play a big part in that, but it really depends right now on the time of the year, because most of you in here we're probably watching our legislative session and trying to see what's coming out of that. And everything that is happening right now is definitely going to impact us in the future. And I do anticipate that immediately after the session that that 5% will probably grow to closer to 20 to 25% and we'll be able to plan for future bond issuance and incorporate our debt planning into the long-term strategic goals of the district.

Steven J. Bassett (02:00):

Katrina?

Katrina Montgomery (02:01):

Yes, I agree with everything that Jennifer said. Yes, it's very limited time. I think 5% would still be a little aggressive for me. I do have a great financial advisor team who they'll call me and say, Hey, Katrina, think about this, think about this. What are you doing? So that definitely helps a lot. So most of my time, like Jennifer said, is spent on our operating budget, and so very limited time on the debt service side.

Steven J. Bassett (02:30):

So for my own personal experience, I have a good idea of what you're spending your time on, and I think it has a lot to do with this next question. Proposed legislation, intense competition, ongoing inflation, and a stagnant basic allotment hadn't changed since 2019. They're all causing serious financial strains for school districts across the state on both the funding and operating side. How are school districts adapting to these challenges, Jennifer?

Jennifer Land (02:57):

Well, we have to be very creative and resourceful right now, and we actually are adapting by making sure that we incorporate the use of bond funds, because right now our bonds are helping to size our budget. And what I mean by that is in the past I've worked in school districts where we were able to build into the budget some large projects, the HVAC replacements, major renovations that we could support with our general fund dollars. But now that's not an option. We're having to really be strategic in our bond planning and making sure that we are upgrading our facilities and instead of replacing or maintaining them doing the normal maintenance that would occur out of general fund dollars, we're really taking our bond dollars and doing large full scale replacements because that's what we are having to do. We have to maximize our capital dollars as well as every penny that we have coming in.

(04:14):

Now, there is no such thing as a fluff. We are looking at things as simple as if we are, whether or not we need to replace HVAC or is this the right moment to just try to do some preventive maintenance on it? And right now we're leaning toward that replacement because we know that we can utilize our bond dollars for that, not only on our maintenance, but we're looking at our technology needs and are placing those items in our bond programs. And then we're looking also at how we utilize and incorporate our grant dollars. Again, every penny that is coming into a school district right now, at least from my perspective, is being scrutinized because we have to make sure we have a holistic approach to our portfolio in educating our kids.

Steven J. Bassett (05:18):

Yeah, go ahead.

Katrina Montgomery (05:20):

That's a good question. So us and ISD, I'm sure everybody here reads the news and stays up and watches our board meetings. So we have $110 million projected deficit this year. So we are looking at everything. We've done a hiring freeze as of March 1st. We're reducing our spending by our PCard spend. We're looking at before you do any purchase order, now you have to get it. And so I'm writing people on a daily basis because I'm saying, well, you're paying $1.7 million for phones, why do we need to pay that for phones? People aren't using voicemail anymore, so we are scrutinizing everything. There is nothing that we're not looking at to make sure we can find, especially for this fiscal year, what we can do to reduce the deficit. Now later for next fiscal year, it's a little bit different. The plans are, strategies are different because we're working on the budget, but for right now, it's everything.

(06:18):

It's looking at software we review, we're looking at community partnerships, we're looking everywhere we can find savings. And then I would also add, we're having intrusive conversations. So no one wants to be asked about why they need to spend money and now that it is what it is. So we have to ask about, well, why do you need to spend these dollars? What is the outcomes for these dollars? Why are you getting this contract again next year? So these are all things that Austin, ISD, we weren't as intrusive as before. And so these are things that we're going to do for this fiscal year to try to reduce our deficit.

Steven J. Bassett (06:54):

Alright, thank you. So along those lines, there's a lot of prioritization that needs to get done. Okay, so how are you prioritizing and managing around the losses and getting buy-in on what to do and what to change? And then just you've been drawing on the general fund, which can't last forever obviously. And then you have to maintain credit expectations. So how are you handling that?

Katrina Montgomery (07:22):

Yeah, so we've been very fortunate. Like I said, we have some great financial advisors. I've seen one is sitting up here front, and so Austin, ISD is, we're telling the story, right? This is not that having deficits is not something that's unique to Austin, ISD, but it is our responsibility to make sure that we're not living in a deficit year over year. And so we're really clear about the actions that we're taking. In August of 2024, we got an additional rating done by s and p and they gave us their highest rating and then we got reevaluated by Kroll in March. So we're telling the whole story. We want to make sure that everybody is clear that with Austin ISD, we're not okay with the deficit. We will do a balance budget, we will make sure that we live in our means, and this is not something that we're going to do year over year over year. And so I really do think that it's helping with the rating agencies for them to see that we're really serious about doing this. This is not something that's just coming from the CFO seat. This is something that our board also believes as well as our superintendent. So having support from all of those areas definitely does help.

Steven J. Bassett (08:30):

Alright, thanks. Jennifer anything to add to that?

Jennifer Land (08:32):

Well, it's a tightrope. That's what it feels like day in and day out. But we are really focusing on being transparent.

(08:42):

Transparent with both our community as well as our board. We've taken measures to involve our community and get feedback. But you know what? In the end, it's really about that strategic alignment. And I believe that our rating agencies like to see that we have a plan in place that we are not flying by the seat of our pants. I think I heard something similar said previously today, but we really are looking at this. We're trying to stay ahead of the curve and we're making sure that we are looking at our liquidity trends and that we are monitoring our fund balance. And it's not a haphazard approach, but it is a strategic approach in which we really are looking at the long term, the end game basically if there is such a thing. But right now it is going to be things as for us, it's something as simple as the language that we use.

(09:49):

A lot of districts around us, Austin included, we are looking at cutting staff. But when we do things like that, we don't want to say we're filing financial or we're going to declare financial exigency. That's not a term that we use. We want to make sure that the words that we're saying actually match our efforts, which are really trying to be, again, more strategic. I think I've probably used that word about 30 times, but that's really what it's about for us as a school district and making sure that our community understands that we do have a plan in place. The plan may not be what we want it to be or it may not look nice or feel nice, but there is rhyme to our reason.

Steven J. Bassett (10:40):

Alright, thank you.

Katrina Montgomery (10:41):

Can I add something to that?

Steven J. Bassett (10:42):

Of course.

Katrina Montgomery (10:43):

One of the things I also talk about a lot is if anybody is a Brene Brown fan, we've been talking about Clear is kind. So you're correct. I agree with that. Everyone is not going to be on board with how we reduce the deficit. Everyone is not going to agree, but we still have to be clear in what our process is.

Steven J. Bassett (11:04):

Yeah. All right. Okay. So Jonathan, shooting to you the financial challenges or whatever else. And so how are your charter school clients handling the environment?

Jonathan Church (11:15):

Yeah, and thank you Steve. And again, Jonathan Church working with Masterson Advisors represent around 20 charter schools here in the state of Texas. So happy to be the charter school advocate on the panel today. And for those that think charter schools are a more recent trend, proud to state that 2025 marks the 30th anniversary of charter schools in the state of Texas being passed by the state legislature. So very exciting times. Been a big part of innovation and growth since that time, bringing those competitive market forces really across the state, major metropolitan areas, suburban areas. And so we've seen tremendous growth in the past, but I think charter schools are not immune to the same sort of challenges facing our ISD colleagues. I think enrollment challenges being first and foremost, especially for again, the more metropolitan based school districts, seeing quite a few demographic shifts in large areas such as Austin, Houston, Dallas, and San Antonio.

(12:15):

We're seeing, again, those demographic shifts. Folks go out to the suburbs. We're seeing general enrollment declines around birth rate, all that fun stuff that's getting a lot of press. I'll just say from the front lines, dealing with almost daily phone calls with these charter folks, it's a real issue and one that folks are dealing with very similar ways, as mentioned by our ISD colleagues, a lot of kind of bare bones measures were implemented with the state didn't pass any sort of basic allotment increase. And again, we're still in the same basic allotment since 2019. So folks are having to do way more with less particularly charter schools. And so that seems to be the name of the game. And again, the same kind of programs that are out there, particularly acute for charter schools, is facility finance issues. We cannot go forth and do a tax levy, so if you see a charter school expanding in your area, do not worry about additional taxes.

(13:09):

We are unable to do that. We have to pay for that additional facility funding from the actual state revenues. So as those get squeezed out, very acute issues that the charter folks and advocates across the state are working on. But really at the name of the game for charters is the ability to adapt and to meet unique challenges. And wanted to share kind of two interesting versions of this that we've seen and we've seen some charter school clients of ours have success number one. Speaking of that demographic shift is a shift to where the students are, which increasingly are these kind of excerpts, these outer suburbs going past our friends in Pflugerville and Austin, out to Bastrop, Kyle and Butta in the areas here in Houston or in Austin and in the Houston and Dallas areas. Great expansion out to those areas to meet affordable housing needs for families.

(13:58):

These are the markets that charter schools traditionally serve are those socioeconomically disadvantaged families. Those folks, along with everyone else seems to be migrating out. And charter schools do have the flexibility to meet those needs to expand with amendments out to these communities. And so they're being very intentional about meeting the needs of communities, serving populations that may not have that educational infrastructure in place today. So it can be very responsive. I've seen that meet that challenging need for communities across the spectrum in recent years. And then number two, we've seen a push in the vein of the school choice topic, seeing charter schools be very responsive, bring additional educational options to the table. One I'd like to point out is the classical education model in particular. We're seeing a renewed interest in that kind of folks looking for a little more academic rigor, more of a traditional school setting, particularly families that may not feel that the public school options available at either a traditional ISD or a traditional charter school meet their family's needs, particularly among families that may be drawn to private school options, but also homeschooling options.

(15:05):

I don't know if folks realize that homeschooling students in Texas make up over 500,000 students today. Massive growth since most of us were kind of part-time teachers. I think a lot of folks thought they could probably do it better themselves. And so they did that and they've acted on that in Texas. And so any options out there that charter schools can use to pull those folks back into the public market. We've seen tremendous growth of that both in the Austin areas as well as just across the state with those sort of models. And so I think, again, charter schools really being adaptive to whatever the educational landscape looks like is really the name of the game here in the future.

Steven J. Bassett (15:40):

Okay. All right. Grayson, can you give us a brief update on Moody's outlook for the Texas school finance situation and discuss current credit trends?

Grayson Nichols (15:51):

Sure, sure. I can do that. First, want to start out saying that we actually have a negative outlook on the national K 12 sector, and a lot of the drivers to that negative outlook are very similar to what we're facing here in Texas. But to go over those real quick, you're seeing slowing revenue growth, pandemic aid being exhausted, rising expenditures, all of those have kind of accumulated into eroding reserves. And on top of that, we're seeing some of enrollment challenges that Jonathan mentioned where we have demographic shifts, lower birth rates, making their way through the educational system. We have the states legislative changes that are making the economic environment more competitive. And we also think that reducing expenditures meaningfully is going to be more difficult now than it has before because there's growing community expectations for school services, hurdles to consolidating and closing schools, but also the additional state and federal mandates that are being put on school districts.

(17:04):

So a lot of these challenges are very similar to what we're facing here in Texas. Again, I don't have to tell our panelists here that revenues have remained stagnant since 2019, all while headline CPI has raised by more than 20% in that same timeframe. So that's been one of the biggest challenges for Texas schools the past few years. And yes, esser funds have helped school districts maintain some relative form of balance, but now that those are being exhausted, we are starting to see larger budgetary deficits like Katrina mentioned. But here in Texas, we still, some districts are experiencing growth in enrollment, right? And those are the districts that are seeing increasing revenues, but at the same time, those expenditures are surpassing those additional revenues. So even the high growth school districts are dealing with cuts in Texas, we clearly have very large and built out urban school districts that are probably experiencing more of the demographic shift as well as the higher competition with other education means.

(18:20):

But those districts are being faced with the tough decisions to cut positions and consolidate and close schools. But fortunately, when it comes to credit quality, Texas school districts have historically been characterized as having very strong reserves and very resilient management teams and conservative management teams. I think the last snapshot that I saw was Texas schools. The median fund balance is well over 40% while their national peer, the national median is less than 30. So that alone has been a good credit puffer for these school districts for these challenges that I've mentioned. But with all that being said, the Texas school district sector remains a very highly rated sector. We at Moody's rate about 340 school districts, and over 60% of those school districts are rated AA three or higher. So we're talking about a very, very strong credit quality for an individual sector. And we have seen rating movement.

(19:25):

It's actually been pretty mixed over the last couple of years between upgrades and downgrades. But to get a better sense right now, I think we have eight districts on negative outlook and only two on positive outlook. And that kind of highlights these challenges that me and my fellow panelists have talked about, and some of the common rating drivers. When we do see a rating change, especially maybe on the downside, it's really a combination of multiple factors within our methodology. We might be seeing the operating deficits starting to erode reserves, but then also increasing leverage because these school districts, whether growing or large urban districts still have pretty significant capital needs in issuing debt. So I know traditional K 12 districts are awaiting to see what the legislation does when it comes to funding, but the sector has remained fairly resilient with all of these challenges.

Steven J. Bassett (20:28):

Okay. All right. So both of the districts here represented painted to recapture on the hood side of things or whatever else. So both of your districts have all of the enrichment pennies. We're not going to get into golden versus copper pennies. Okay, we'll spare you off from that. But besides having those pennies as far as whether or not there's any additional state aid and gaining more enrollment, is there anything else you can do to increase recurring revenues?

Katrina Montgomery (21:03):

Okay. Okay. Well, obviously if the basic allotment is increased, that would definitely help us. We're doing other things like we have bus arms, and I'm sure everybody knows what that is. When you have your buses, we have people who continuously repeat offenders who go around the bus when the arm is out. So they get a charge, they get a fee, and so we're going to start making sure that we get revenues from that. We are looking at doing naming rights, trying to figure out ways that we can name our buildings and hopefully get some additional revenue from that. We're doing what we call average daily attendance incentives, which helps our teachers continuously to increase our average daily attendance, which also increases the revenue that the district gets. And what we do in partnership with the campuses is we give them a piece of that funding back, so they get some of the funds back that we've received in addition for the average daily attendance. And then our transportation department also does bus routes during coda. So we're trying to figure out a lot of different ways to increase revenues and trying to, because we know we can't just cut our way out of this. So what are the other ways that we can do to make sure that we're balancing our budget?

Steven J. Bassett (22:19):

Okay, Jennifer?

Jennifer Land (22:20):

Well, one thing that we always are cognizant of is when we are trying to increase our revenue streams that are not, and that revenue is not necessarily coming from the state, we realize that we are taking money out of the pockets of our taxpayers, our community members, and our stakeholders. But with that said, we do realize that there are some opportunities that we can leverage, and we have looked at expanding our career and technology programs. I know that will bring in more money from the state, but that is also a direct benefit to our students and ultimately the workforce, the future.

(23:03):

Because we're getting our students prepared to enter the world. We also have focused a lot on some early childhood programs that some of them are tuition based because that is bringing in some revenue offsetting some costs, not the total costs. But again, that is preparing our kids for the future and setting the stage for academic excellence. But when we change that lens and go toward the operational side, we always are driven back to our facility rentals and the usage that we can allow our community to take advantage of. And one thing that we have tried to be really strategic in is looking at how to maximize our bond dollars to help us drive in or increase that facility rental revenue. Because if we have nice facilities, the community will want to rent them. There may be some varying trains of thought about whether or not it is beneficial to do that because of the wear and tear on your facilities.

(24:22):

However, we try to maintain those facilities and make sure that we are performing the required upkeep and maintenance. But what we have realized is that when those facilities are being utilized and being rented by our community, it is bringing in revenue. There are some just small things like Katrina mentioned, trying to advertise and doing some other just small, some small efforts. But primarily, unfortunately, Steve is going to be that driver. It's the state revenue, the increase in the basic allotment, the increased funding for our special needs, our special population students, what's going to get us the most bang for our buck.

Steven J. Bassett (25:16):

Yes, yes. So one of the things we talked about earlier, and we will begin the voucher soon, this last question before we get into the vouchers, but Jennifer, earlier you talked a little bit about how you're using bond funds. I did want to give Katrina a chance to mention something like that in terms of how are you using bond funds to help shelter things On the general fund side?

Katrina Montgomery (25:36):

Yes. We're trying to be strategic about how to do that, right? So one of the things we're talking about with our financial advisors is a maintenance tax note. And we're also trying to make sure that any expenses that we would normally have. So Jennifer talked about HVAC. So we all know HVAC is a big thing. So how can we look at where our bond funds were approved for a school and do we just temporarily fix it? Do we just rent the unit for a couple of years because we know that in another year or two the school might be modernized? Those are the ways that we're trying to utilize the bond as much as possible to reduce our general operating cost.

Steven J. Bassett (26:15):

All right. So let's get to the topic a lot of people want to hear about. So with what you've seen about ESAs and vouchers, how do you expect them to impact your districts, Jennifer?

Jennifer Land (26:26):

Oh my gosh, we don't know. I mean, that's the bottom line. We don't know yet what we don't know. However, if I had that crystal ball, actually, I don't need a crystal ball because we do anticipate that there will be an impact just because sometimes things that are new look really, really good.

(26:49):

And we anticipate that some families will want to take advantage of the ESAs, but the thing that we have to focus on is the long-term. What can we do long term to make sure that if a student is not succeeding in the current public school environment in Pflugerville ISD, what can we do to make them succeed? Want to stay there and continue to find what they need in our public schools and should they go somewhere else and they find out that that's not what is going to propel them forward, what can we do to help bring them back into the fold? So we are looking at it both in a short-term manner and a long-term manner, but we believe that right now the whole ESA conversation really jeopardizes the long-term sustainability of our public schools. We are looking at what we can try to do to remain relevant and make sure that we are educating the kids who we have and the kids who will hopefully see fit to come back to Pflugerville ISD, that was a long thing to say that we really still don't know, but we are trying to prepare for what we believe could be the worst case scenario.

(28:28):

If the ESAs pass, we do anticipate that our current funding struggles will be exacerbated. It will definitely increase because the reality might be that we are struggling to do the same amount of work with less funding. Not that we're not used to that, but it's getting less and less and less. I had a conversation just a few hours ago with some fellow CFOs and we were talking about budget cuts, and we said, we have been cutting for the past three to five years. We are no longer with the fluff. And I said this earlier, there is no fluff left. We are cutting necessary programs that are vital to education. It is no longer supplemental. It is all direct impact instructional programs that we are down to cutting. So if people, when I hear people say the low hanging fruit or they still have a lot that they can cut, I'm the person that says that's just not all true. So we are still looking at or still analyzing or waiting to analyze what the possible impact of those ESAs could mean for us, but the outcome does not look bright. Yeah.

Steven J. Bassett (30:08):

Anything to add, Katrina?

Katrina Montgomery (30:09):

No, she did it perfect. I was just sitting here writing, thinking about writing things down. I mean, you answered it perfectly. It would negatively impact us. One of the things we see at Austin, ISD, we have, we have a lot of students in elementary, but our middle school drops off and then kids come back in high school and we're really clear because everybody wants to do some type of sport or some type of fine arts, so they come back. So Jennifer's correct, we have to figure out how to bring the kids back that they want to stay with us. Even if you do go to a charter school, we want you to be very clear that you're not getting all the additional services that you would receive if you were in a public school. So we have our work cut off for us because if we do end up having to lose students, that's funding. And so then that's additional cuts that will have to happen. And it's already pretty hard now.

Steven J. Bassett (31:04):

Yeah. All right. Jonathan, what are your clients saying about the potential impact of the ESAs vouchers?

Jonathan Church (31:10):

Sure. And I think a lot of the charter schools we work with, it's very much what Jennifer and Katrina were mentioning, really waiting to see what the final product looks like. Lots of folks looking at that, lots of folks strategic planning for various scenarios. I will say that in addition to some of the enrollment challenges and other sort of issues that might be out there, a lot of our charter schools are looking at opportunities that might come of this. I think, Jennifer, I heard you mention this as well, but this bill in other states doesn't just pay for your daily school needs. There's other options. There's other funding streams that charter schools might be able to take advantage of or would be charter schools would like to take advantage of in this environment. And so folks are looking at it opportunistically as well, what might be out there for them.

(31:57):

Certainly, again, charter schools as a whole, really the focus has been historically on the socio-economically disadvantaged populations. High free and reduced lunch populations has really been the bread and butter for charter schools across these 30 years. And the expectation is not that the students would move masse from public schools over to private schools. We've got history recently with states like Florida and Arizona where you've got other similar programs having been passed, and you're seeing a much more mixed effect on enrollment, particularly to charter schools in those states. And so keeping an eye on that. I will say the winners of this thing, it's hard to find a ton of winners from the public school side, but certainly within school choice have seen a bounce back from schools like your traditionally underserved Catholic schools that have seen extremely rapid enrollment declines post COVID. And really before that, we've seen in states like Florida, those schools really be given a lifeline from families.

(32:58):

If you can make $10,000 work for tuition, you've got a really good school model that would work in a ESA type situation. These are not St. Mary's Hall in San Antonio. That's not the school. This is for fans of nineties cinema. It's if you think Sister Act two, this is St. Francis High School where Lauryn Hill went under the tutelage of Whoopi Goldberg. That's the perfect school that this would really do well for these ESA vouchers targeted to lower income students initially. And so that's the kind of schools that we've seen an uptick in that market. But overall, the net effect expected to be neutral or really a wait and see attitude from our charter schools.

Steven J. Bassett (33:40):

Okay. All right. Grayson Moody's put out a paper a year ago this month talked with comments on legislative efforts to increase competition, and that was on a national base. That one just focused on Texas. Do you have any comments on that or anything?

Grayson Nichols (33:56):

Sure. And thanks for the shout out the research. Shout out, Steve, I appreciate that. But maybe I can comment on this more of a methodology kind of standpoint of how it could impact K 12 schools on a methodology basis. But like Steve said, we have commented nationally on school choice and have said that programs like this have and will continue to kind of chip away at the enrollment base and the once strong monopolistic moat that K 12 traditional K 12 districts once had long ago, and legislation that promotes competition between charters, traditional K 12 schools and private schools will really clearly have a material impact on enrollment and especially K 12 capture rates, which is the percentage of local districts located within a local school district that actually attend the school. And since states like Texas generally tie funding to enrollment, that could have clearly an impact to revenues and can create a budgetary management issue.

(35:13):

And so in our K 12 methodology, one of the figures that we look at is a three year change, a compound annual growth rate for enrollment. And that's really to assess the overall local economy. And when you see competition come into play, it can can skew that, especially for an area that has a stable economy or even a growing economy. So that enrollment can really can skew or we can see these declining enrollment trends. And if we see these declining enrollment trends, we really turn to assess management as management working within the current framework to balance their budget and balance operations. If a district is letting enrollment losses lead to imbalanced operations and declining reserves, I think that's really where it could impact school's credit worthiness.

Steven J. Bassett (36:08):

Okay. All right. So I'm going to jump in on this one a little bit because saw an article today, Fort Worth reporter, about Fort Worth and how they think that vouchers are going to impact Fort Worth. And so some of the numbers in there are interesting. There's 52 private schools in Fort Worth. The average tuition is just over $15,000. So the ESAs being that they're talking about is $10,000. So it doesn't get there.

(36:36):

And we're not talking about this is an average for all of 'em. One of the differences between the privates with regard to pay privates in the public, the private schools do pay their teachers on average less then the public schools, and they're able to do that because the kids are easier. They could be easier. Maybe the parents aren't, but the kids are easier. And so what I see happening with this is that I do think that if they do come, there will be a tuition increase by the private schools, and then the private schools will use that money to pay their teachers more, and that'll erode that gap, that advantage from the pay perspective that the public schools have. And I hope that doesn't happen because we need good teachers in the public schools. I mean, we really, really do. But I do see the tuition going up.

(37:33):

I wouldn't say it's a full offset or anything like that, but there will be a billion dollars put into the program. They've capped it. And so that's going to work out to a lot of kids, going to a lot of schools. But what'll be interesting though, is that because of that gap there in that 15,000 versus 10,000, I don't think that the lower level, lower poverty kids will be able to afford that to close that gap. So what I think the folks that are going to end up taking advantage of this are those families that are on the margins now thinking about, well, can we afford it? And then they've made the decision not to. That's where I see the kids coming in. So anyway, we'll see what happens. I'll bet anybody lunch on that if they want to later, but anyway. Okay. Alright, so changing gears a little bit, Katrina, and we mentioned consolidation just a minute ago. I did the math. Austin ISD has 650 kids per student, which is pretty much on the low side compared to some of the other districts. You guys have been talking about school consolidation. Where are you guys at on that topic?

Katrina Montgomery (38:44):

We're saying right sizing, right? And so we're trying to figure out what that looks like. So we're right sizing. And so we've just really started, we've had two board meetings where we've talked to our board about that. We are doing a plan, so we're trying to figure out what the plan looks like. We're going to create a tool and every school will go through this tool. And so that there won't be someone who could say, well, you just looked at if you're from Austin, you just looked at East Austin, but you didn't look at West Austin or South Austin. So every school will go through this tool and then we're going to get out and here, get feedback. We do have some schools that might have a smallest 200 to 250 students, which we know that's just really ineffective for our campuses. So we are talking about right sizing for FY 26, 27, and just trying to make sure that we do it strategically.

(39:39):

Austin ISD did it in 2019. It was all over the papers. And so we're developing a steering committee that's going to help walk us through this so that we can make sure that we're talking to the committee, we're talking to our staff about the plan, we're keeping them in the loop so that we can hopefully make some good decisions. Looking at lessons learned, which is really big, and looking at what other school districts have done. This is not something unique to Austin. ISD. One of the things we show to our board is how many other school districts are currently going through it now, so we can go back and look at their plans to see what worked and what didn't work. But the biggest thing is creating the tool, make sure we're giving our community regular updates, being transparent, being clear about how we're going to go through this process, and then being very clear about the number of schools and how does that look going forward. We don't really want a lot of, I think in 2019, one of the lessons learned is that people felt like they could come to the community events and when they come, they could really persuade or change people's minds. We really want to be clear about this is the list, this is how many schools and this is how we're going to proceed.

Steven J. Bassett (40:52):

Okay. All right. So Jennifer, changing gears a little bit. Your district passed a proposition for almost 44 million in bonds dedicated to affordable housing. How that worked out so far?

Jennifer Land (41:04):

Yay. But we're not housing developers, but it is a wonderful thing for our staff. It has taken us a while to get it off the ground because there have been opportunities for us to learn more about it, but our community is excited, our staff is excited, administration is excited about what it's going to look like. We are currently in development stages, and if all goes well with permitting and getting the right site, then we could possibly break ground on that by the end of the year. And it is a journey that we are excited that we are one of the largest districts in Texas to partake in this journey with our community. The housing was something that we felt we needed because I don't know if you all in here are familiar with the Austin area and the values in the Austin area, but even in Pflugerville, our average home value is close to $500,000, and that automatically eliminates the home ownership opportunity from a lot of our staff.

(42:28):

And our starting teacher salary is a little over 57,000, but our starting auxiliary or clerical paraprofessional wage is $17. We realized that we have a gap that we needed to feel. And the thing that really opened our eyes with our teacher housing is in two summers ago, three summers ago, we had several, a lot, numerous, however you want to say it, people who accepted positions with our district and they came down to try to find a place to live, and they had to rescind their acceptance of the job. That is when it really opened our eyes to the problem that we have. And right now it is, we anticipate that it is going to be a very powerful marketing tool for our school district, and we're in the stages of looking or determining what it's going to look like, but we are excited about the opportunity that we have. And 44 million may seem like a lot, but believe me, it's really not that much when you're trying to build some really quality housing that our staff is going to be proud of. That is our goal, and we want to make sure that when we do this housing that we do it right, because we know that a lot of people are looking at us.

Steven J. Bassett (44:07):

Yeah. Well, it's good to have good news about something here with the of representative done here, but so we're hopeful that the state is going to do something. Is there anything that you see in the legislation that is going to provide short-term relief for districts?

Jennifer Land (44:24):

No.

Steven J. Bassett (44:26):

Okay. Yeah. Next question. Okay, next question. One thing we don't know, and I do think that the house will do something on the basic allotment, but it's not going to be huge. No. I mean, I've heard between three and $400. What people have to understand is that what by law, by law, by current law, whatever is increased, 30% has to go to salaries for teachers, nurses, counselors, and librarians. They're actually going to up it to 40%. And so I don't know where y'all are going to get raises for everybody else. But anyway,

Jennifer Land (45:01):

I just want to make one point about that. When you say short-term relief, it is really short term For Pflugerville, ISD, I looked at our runs. We get a one-time bump for 25, 26, but for 26, 27, we lose 500,000.

Steven J. Bassett (45:17):

Okay, good time.

Jennifer Land (45:18):

So I look at the long-term impact of the current legislation and short term is very short-term. We will be back in the same boat that we're in with our funding shortfalls in a year.

Steven J. Bassett (45:33):

All right.

Jennifer Land (45:33):

So this time next year, we'll be having the conversations about cost cutting measures.

Steven J. Bassett (45:37):

Right. Again, again, it's a recurring theme as far as the legislative session, and there's a lot of things, and they talked about some of the debt related bills. So this is really for everybody. Are there any bills that surprise you or discourage you about what's going on right now with our friends in Austin?

Jennifer Land (46:00):

Surprise, no. Discouraged. Yes.

(46:03):

I'm really anxious about a couple of bills. One is to prevent DFE or early retirement of debt because my philosophy and my board and superintendent's philosophy is to not have that fluctuating debt service rate. And we have put some things in place so that we actually have lowered our debt service rate by over 10 cents, actually 12 cents in the last three years. But we know that we can't, it's not prudent, fiscally prudent to keep doing that. And early retirement of debt in a district such as Pflugerville, where we anticipate going out for bonds every three to five years, we need to be able to do that so that our community won't have a huge shock of a 10 cent increase in the tax rate when we do want to go out for a bond. So that bill is very disturbing to me. And then I think there is some bill out there to change the passage rate of a bond to a super majority. And if that's the case, I just think we've lost pretty much any opportunity to pass a bond.

Steven J. Bassett (47:27):

Yeah. Well, one of the things that's in that house Bill 19 that was mentioned was a uniform election date in November for all municipalities. Grayson, regarding that, what kind of impact could that have if you lose an election in a high turnout election? What kind of impact can that have on the credit ratings?

Grayson Nichols (47:48):

No, sure. We did see a lot of school districts go out for both bond authorizations, but also Vader or voter approved tax ratification elections. When it comes to the Vader, we saw actually a lot of those fail, and I know it was a presidential election and more people at the ballots, but we did see a lot of both authorizations and Vader fail. I think 52 districts went out for Vader and 30 of them failed. And I think all the reasons that we've talked about, the budgetary challenges have really led those districts to try to exercise enhancing revenues. And given that it's not a guaranteed proposition, I think it just highlights how much budgetary problems that school districts are facing right now. But again, just because something has failed doesn't necessarily mean an immediate credit impact. There's still, management still has the time to right size operations based on a pass or fail scenario. On the bond authorization side, I think there could be long-term ramifications where when a school district fails a bond election, it really puts management then has competing priorities, right? I mean, Jennifer and Katrina, you've already said this a couple times today, do you do a tech refresh or do you raise salaries? Right?

(49:15):

You have these competing pressures when you're trying to look for general fund dollars to pay for things, and it is not feasible to do very large projects with general fund money. And so when you do see a failed bond election, I think districts then face even more deferred maintenance. But then also you might see a larger bond authorization down the road because not only inflation, but just rising construction costs. I know you probably haven't heard this word before, but tariffs will likely have an impact to construction costs. The cost to build an educational facility in the last 10 years has really ramped up, and we don't see that slowing down. So a failed election could come at higher fixed costs and higher authorizations in the future.

Steven J. Bassett (50:07):

Yeah. So I think we're just about out of time, but does anybody have any questions for this great group? I don't know if I can really even see, guy. Do you see anybody raising their hand out there with these lights there? Okay. Well, that about wraps it up for us. We're pretty much right on time, so thank you all very much. Thank you.