VALLAS FACTS: Financial Lies... Budget and accounting tricks, plus union concessions -- not financial talent -- brought about the claims of 'reducing the deficit' during the early Vallas years
[Editor's Note: The Chicago Board of Education was never very imaginative in creating its budget fictions, even during the early and mid- 1990s, when Paul Vallas was coming into the system. As Substance analysis showed, the simple trick of overestimating expenses and underestimating revenues could produce a projected "deficit" every year simply through phony bookkeeping. The real mastery that led to Paul Vallas's later claims that he had overcome a 'deficit' of a billion dollars (or more) in the years after 1995 came from the simple fact that corporate Chicago's reporters didn't bother to read the numbers and ask critical questions. Below is one story from the March 2002 on line edition of Substance. George N. Schmidt, Editor].
Phony deficits planned again… The legacy of Vallas’ financial manipulations: feast or famine? By Leo Gorenstein
Paul Vallas is running for Governor based on the claim that he left the school system with a $345 million surplus for the fiscal year that ends this June [June 2003]. Yet the Chicago Board of Educatoin took the extremely unusual step of shifting $49 million from the funds meant for educating children to pay its debt on bonds in June 2001. And in late February, all schools received an urgent memo telling them to plan for a 5% cut in their budget in the current fiscal year, and a 10% cut in their school’s budget for next school year. Further, vendors are complaining that the Board has instituted a major slowdown in paying them.
The school system faces escalating bond debts in the next several years, as the cost of money borrowed in the last seven years to build and rehabilitate schools mounts up. So, is the school system in a rosy financial situation (as Vallas claims) or facing a serious deficit? Answering this question will require some painstaking investigation.
The history of the Chicago Board is filled with financial trickery. In fall 1993, for example, the Board of Education cut 500 high school teachers and 283 elementary teachers, claiming a financial crisis.
And it was reported in the mainstream press that everyone agreed, including all the “watchdog†groups (except Substance. See Substance, September 1993), that the board really did face a deficit, this time. Unlike the past, the Chicago media reported, the board really did have a tight budget.
On September 8, 1993, as school began, Diana Nelson, the president of the business community’s reform group Leadership for Quality Education (LQE), speaking in the auditorium of the Northern Trust bank, claimed that all the “watchdog groups†that traditionally monitored school finances agreed that the schools couldn’t cut anymore from its budget. Nelson never mentioned that LQE’s own budget analysts had recommended significant cuts from the budget in their summer budget testimony.
Then, one week later, the Chicago Teachers Union gave $61 million in concessions. The union’s leaders told their members that it was absolutely necessary to make these concessions. The bulk of the $61 million came from the above classroom teacher cuts and the CTU gave up on trying to win back the 352 jobs of the laid off truant officers, clerks and library aides.
But the board wound up the 1993-94 school year with a surplus around $100 million. How’d they do it?
Board has a laundry list of deficit building budget tricks
To predict a deficit for the future one can underestimate revenue, overestimate expenditures, or do both.
Prior to the 1993-94 school year, the board mainly relied on overestimating expenditures in the biggest area in the budget, employee compensation. After the 1994-95 school year began, it became clear that the board had overestimated total employee compensation by about $90 million for the 93-94 school year. (See Substance, September, 1994.) It became apparent that the CTU didn’t need to make the $61 million in concessions, that the students didn’t need to lose all those classes, and that the teachers didn’t need to lose all those jobs.
But, as one source told Substance at the time, “They really loaded last year’s budget.†Here are some of the techniques the board has used over the years.
The budget-jobs-at-more-than-they-cost trick.
In 1993-94, the board’s pre-concession budget claimed that 3,000 less employees would cost $82 million more than the year before. They did this even though the average Chicago teacher salary went down from $43,087 in 1992-93 to $42,125 in 1993-94.
The budget-all-jobs-at-100% technique.
It’s impossible for any entity with 45,000 jobs to keep all of them filled all the time so most large institutions budget for savings from vacancies by budgeting positions at, for example, 97% of cost rather than 100%. The city budgeted for a 3% savings from vacancies. But, in the early 90s, the Chicago School Finance Authority (SFA) wouldn’t allow the board to use a vacancy allowance. It wasn’t until the 1995-96 school year that the board finally used a small .75% vacancy allowance.
Claim that you can’t reduce the year-end cash balance no matter how huge.
Every year the board plans to end the year with cash on hand which is something any organization would want to do. The problem is that the board has ended many years with quite a bit more cash on hand than it said it would. Because of this practice and huge end-of-the-year balances, the Illinois legislature both prior to the 1990-91 and the 1993-94 school years forced the board to reduce their ending balance and use it to reduce the claimed deficit.
At the end of the 2000-01 school year, the board had a $346 million ending balance, according to its current budget. In fact, it had so much surplus it took $49 million of the surplus to pay off bond debt. Way back in the 1980s, then board budget director Rufus Glaspar questioned how much the ending balance (then set by the School Finance Authority's "restriction calculation") should be. He said he didn’t know if the ending balance should be $20 million, $50 million, or $100 million at that time, but that it should be looked at to determine what’s right. The same is true today.
Throw lots of money in budget nooks and crannies with catchy names like “Other Chargesâ€.
During 1993-94, when the board gained $61 million in concessions from the CTU, they ended the year with a $197.5 million cash surplus in “Other Chargesâ€. Enough said.
There are many more techniques and tricks to building a deficit projections.
Underestimating revenue wasn’t even in the above list but it provided for large surpluses at times in the past.
Historically, the board has been able to keep down the ending fund balance by spending many millions on items that weren’t in the original budget. They knew they’d be able to do this because of the above techniques they used. That’s why the public only saw a $50 million surplus at the end of the 93-94 school year, not the actual $100 million.
“You may never see that $100 million figure. They inflated some revenue which will reduce the figure and they will spend [some of the surplus] it and will encumber other money [to reduce the final surplus figure],†a source told Substance at the time.
During the 1993-94 school year, once it became apparent that they would have a huge surplus, the board spent $50 million on what it termed “critical needsâ€. This included $9 million for building repairs, $19.5 million for management information systems, $14.6 million for educational environment, and $7.2 million for instructional support.
Here we go again
Chicago teachers should prepare themselves for an onslaught of dire deficit predictions. But one can rest assured that a significant part of those dollars will be built on false, or unnecessary premises. Do the schools need more money? Sure. Did Paul Vallas spend, spend and spend some more for the bureaucracy and other of his treasured projects? He sure did. Will the CTU be under great pressure to cave in? Of course.
But don’t lose heart. Just look in the biggest piles.
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