George,

I met this morning with Orma, Glenn and Donna regarding the reconciliation of the financial projections Glenn developed and those put together by Business Services. I have attached a spreadsheet I prepared for the meeting that highlights the Revenue and Expenditure projections from both analyses, and attempts to reconcile the differences. The highlights:

1) Revenue: The projections agree within $3.7M cumulative over the 5 year period, with differences due to Business Services using project enrollment (down 104) students) and Glenn looking at flat enrollment. The other difference is the growth assumption in foundation and other funding, both happen to use 1.9%, but apply it to different factors driving a slightly different result. The projection differences are within a reasonable range and not of significant concern.

2) Expenditures: There is a much larger discrepancy between the expenditure projections, $25M cumulative over the five years. This is what I was concerned about this weekend. In this case, the differences are due to fundamentally different approaches to the question. Business Services projections are done using the financial assumptions I reviewed with you and Glenn on Saturday. I do not believe these are overtly biased, some assumptions are aggressive (ie no salary increases beyond the AAEA and Quad A current contracts). Their projection is basically what they believe will happen if nothing is done to alter our current course and speed of spending, applying their best insight into the likely cost factors that drive district spending.

Glenn's analysis has a valid perspective as well. He is not encumbered by the discrete assumptions in the Business Services analysis, rather the takes a view of affordability and picks the expenditure targets for each year that fits with his financial picture, converging revenue and expense in 2007 and interpolating for the intervening years by drawing down on fund equity. His approach is desirable, but it assumes a fundamentally different management model (much like the approach you described in the Finance Committee meeting this morning). This is a new approach for Orma and team (and for the district), and rightfully they have concerns about a future board's willingness to live within this constraint.

Discussing the new HS costs work well in this model, as the HS reserve Glenn proposes in 06 and 07 prior to the opening, will ease the burden of the incremental HS costs. The challenge is setting aside the reserve may be tough when faced with real operating cost pressures in 06-07 without a fundamental change in management practices as you outlined this morning.

I believe it was very helpful to have this discussion, although I recognize it may have been uncomfortable. Glenn early in the meeting asked for clarification of my role in facilitating the discussion, and assisting in the preparation of the financial plan for the Board packet. I believe we ended on a healthy note, but I mention it for guidance if my efforts are in any way counter productive. I believe Orma and team are comfortable with my role. I am trying to get everyone on the same page so we can discuss the financial plan with confidence, and with a consistent voice. I really want to see the district move ahead with the comprehensive facilities recommendation.

I understand that a meeting has been scheduled for tomorrow at 2:30 (Orma, Peter, etc) to discuss how the Financial Plan should be discussed in the Board packet. I look forward to the discussion and to your direction on proceeding.

Jack
ps. I did not copy anyone other than Peter on this note as I am sensitive to the people involved in the discussions and these are only my views.

Jack Baker
bluejlb@umich.edu
(734) 834-6150
"Revenue Expense Recon#3DF22.xsl" (missing attachment)

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