Finding the Leak

by Rocco Versaci & Shannon Lienhart


I once came home to a note from the water company on my door. It said that my bill had been unusually high and warned me that I might have a leak somewhere. So, I called a leak detection service, and one of their technicians spent an entire morning checking various parts of the house with various kinds of equipment until he located the leak. Accomplishing this took some time and work; it was several days before someone could come out, I had to rearrange my schedule a couple of times, and the process of detecting the leak involved many steps in order to eliminate false leads and zero in on the real problem.


What the water company didn’t say was, “Hey, cut back on your showers.” It would have been easy and obvious to say that, and if I had cut back on my showers, it might have temporarily and superficially reduced my bill, but the real cause—the leak—would have remained.


This is a common story, as anyone who has received a similar note can attest. What is notable about it is that it illustrates the basic but important principle: if there are anomalous spikes in expenditures, you should look for an anomaly and do the hard work to find it.


Those who oversee and have a powerful voice in making recommendations regarding Palomar College’s budget could learn something from the water company.


On November 12 of last year, the Fiscal Crisis and Management Team (FCMAT) delivered a report to the Board of Trustees that documented their findings based on fiscal information provided to them by the District as well as one day of interviews. While the findings and recommendations were extensive, most attention was paid to their first recommendation, which states that the District should “immediately begin bargaining with all constituent groups and reviewing all aspects of contracts. Evaluating the management’s right of assignment, health and welfare benefit costs, and the entire salary schedule, should be a high priority.”


Dr. Blake wasted no time in echoing this recommendation by FCMAT. At that very same meeting, in fact, during her later report, she called employees’ benefits package one of the “richest” in the state (jump to the 2:44:00 mark) and followed those comments up a few days later with an email that reiterated FCMAT’s focus on salaries and benefits.


Even the Chancellor of the California Community College system, Dr. Eloy Ortiz Oakley, has joined this particular chorus. When Trustee Nancy Ann Hensch and Acting President Jack Kahn (Dr. Blake was put on administrative leave in mid-December) appeared before the State Board of Governors, Trustee Hensch was told by Chancellor Oakley that, “you’re going to have tremendous political pressure on the Board from the various constituent groups that in some ways may be financially harmed by the decisions you’re going to make.” The assumption he makes here is that obviously the solution here is to “financially harm” employees.


Salaries and benefits are an obvious target, as they routinely make up 85% – 90% of any given school’s operating budget. But let’s take a closer look at things before we buy into the story that these items represent the real “leak” in Palomar’s budget.


What follows is an analysis of the relationship among our revenues, expenses, salaries, and benefits—both the state-mandated benefits as well as our health benefits (two very different parts of our total benefits package). First, though, let’s examine the situation to get a better understanding of the financial crisis that we face.


Note:. Here are links to source documents, spreadsheets, and methodology , which we are including for transparency. If any reader has concerns about these, please forward them to us, as our intention is to provide reliable information.


THE SITUATION

When Palomar’s total revenues and total expenses over the last several years are graphed alongside each other, one can see that beginning in 2017-18—when the North and South Education Centers opened—expenses surpassed revenues. To complicate matters, the revenues themselves are artificially inflated (i.e., “short term”) due to several temporary “Band-Aid” mechanisms such as stability funding, rolling back of summer enrollment to exaggerate true enrollment, and one-time transfers of funds.



Using these short-term revenues, the district made long-term expenditure decisions based not on data, but on hope. The FCMAT report reveals that, instead of using realistic enrollment projections based on “historical data, demographic trend analysis, high school enrollments, community participation rates, or industry standards,” the District’s enrollment projections were goals; that is, the projected revenues were based on the enrollment of Full-Time Equivalent Students (FTES) that they wanted the centers to deliver.


Despite the fact that there was plenty of evidence that the District’s enrollment goals were not being realized, the expenditures continued to increase unabated as though the temporary fixes would continue indefinitely.


To illustrate this, the graph has been extended to include the 2019-20 budgeted revenues and expenses.



THE PROBLEM

The problem is that the 2019-20 budgeted revenue includes both a $5 million dollar transfer from the retiree health benefits fund as well as extra, temporary income that was designed to give the college an opportunity to restore lost enrollment. Unfortunately, the enrollment has remained relatively flat and the hope of great gains made by opening the centers did not happen. Once those temporary, extra funds are removed from the revenue, the graph looks more like this:



(Note: Please see this link for information on how the new projected revenue was calculated.)


The expenses in the above graph are most likely exaggerated as the District has a habit of always inflating their budgeted expenses in the category of “other outgoing.” The actual expenses in this particular category are consistently below the budgeted expenses by millions of dollars, as this table shows:


Other Outgoing Expenses


Assuming this trend continues this year, we will likely see our total expenses reduced by $13 million. By removing this amount from the projected expenses, the situation illustrated in the graph above will have improved. But, Houston, we still have a problem, as indicated here:



WHAT ABOUT SALARIES AND BENEFITS?

We have included the opening of the centers on the graphs above because they are currently not being discussed regarding Palomar’s fiscal situation (more on that below). What is being discussed are employee salaries and benefits. Using the audited numbers from the last five year (2014 – 2019), one can see that the percent of expenses devoted to salaries and health benefits have actually decreased:



We are specifying “health benefits,” and there is an important reason why. When the District talks about “salaries and benefits,” the benefits they are referring to include district contributions to statutory and federal benefits such as STRS, PERS, FICA, Medicare, unemployment, worker’s compensation, etc. as well as employee health benefits. The District’s contributions here are mandated (i.e., not negotiated), and there is no doubt that the district’s contributions to these benefits—in particular, STRS—have jumped enormously in the last few years. But the rhetoric surrounding our problems and the proposed solutions have targeted health benefits, despite the fact that the cost of those has remained relatively stable. The comparative trajectories of the state-mandated benefits and the health benefits can be seen here:



But even when adding in the increases to the mandated benefits, the overall percent of the district’s expenses devoted salary and total benefits has remained extremely stable over time—ranging from 84% to 86% of expenses. These percentages are well within the norm for community colleges across California.



THE SOLUTION

From FCMAT to the Chancellor’s Office to our very own campus, the assumption is that Palomar’s “leak” will be plugged through layoffs and/or cuts to salaries and health benefits. As the above graphs show, however, these particular costs have not spiked; in fact, they have increased at a lesser rate than have our revenues. In other words, the “leak” is not coming from out-of-control salaries and benefits, and if we’re going to solve this problem, then we need to take an in-depth look at the anomalous spending and have an honest discussion that puts everything on the table—including a clear-eyed assessment of the North and South Education Centers.


As is apparent on the first four graphs, the openings of those centers correspond to the precipitous rise in expenses. To repeat a point made many, many times before, opening both centers at the same time was not the original plan, and the decision to change that plan and open both centers at once was enacted with very little analysis (see “A Careless and Costly Decision”).


One reason that the centers are not under discussion could be that the District believes it must stay the course and keep them open because of the possible money available from the state when they reach 1,000 FTES and become eligible for "center status." There are, however, two significant arguments against this. First, the enrollment projections at the centers are not trending in a way that justifies their ongoing exorbitant costs; projections are being given in percentages rather than in FTES, which distorts the enrollment growth that the centers are experiencing (see “A Half Truth Is Not the Truth”).


Second, the FCMAT report states that chasing enrollment will not help. In the Summary section, it reads, “The district has now reached a point at which it is not possible to solve its fiscal distress through enrollment growth and related revenue increases.”


Interestingly, the report continues with, “The district should have conducted studies to support expanding its educational reach more than a decade ago to ensure the entire district is served. Having missed this opportunity, it will need careful planning to balance its limited growth funding and increased operational expenses.”


One clear option to address our “increased operational expenses” is to shut down—perhaps only temporarily—one or both centers. It is not at all uncommon for businesses to expand too rapidly—it is, in fact, one of the biggest missteps that businesses make, especially when they haven’t done thorough research regarding that growth. The course taken by successful businesses faced with such a situation is to pull back, but as of yet there has been no serious, public consideration on campus about closing the centers in order to halt the deficit spending and reevaluate our plans to expand.


If the Trustees—or a Special Trustee empowered by the Chancellor—simply hack away at what’s not the problem, there will be numerous unintended and disastrous consequences: abysmal morale, difficulty in attracting diverse and qualified employees, damaged student learning environment, etc. More important, those cuts will not have addressed the underlying problem, and we will move backward at a speed and degree from which it will be impossible to recover.


If Chancellor Oakley is reading this, then we call on him to exhibit some real leadership in this situation by moving beyond the convenient narrative that has dominated discussions of higher education for decades—namely, that the “fat” contracts of faculty and staff are responsible for schools’ low performance and high costs. The real problem is the growing corporatization of higher education. Other symptoms, by now familiar to us all, are the reference to college presidents as “CEO”s, the failure of those CEOs to embrace basic principles of good business (e.g., don’t overextend, have a solid business plan, etc.), and the seemingly endless river of money that flows into the pockets of consultants and away from students.


So let’s look into the real culprits of fiscal instability at our institutions of higher education and stop blaming the workers. Let’s engage in the critical thinking that we’re expected to perform as academics and that we’re expected to encourage as teachers.


One final note. There are a lot of people who are paid a lot of money at Palomar to thoroughly analyze this situation, and we are left wondering why those of us who are paid primarily to teach must also spend our valuable time and energy analyzing budgets in order to bring this data to light. All stakeholders need to demand and participate in a clear accounting of the situation so that a flawed narrative doesn’t muddy the process of finding—and fixing—the leak.

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