Dangers When Forecasting Compensation Supplemented by Categorical Funds.

Categorical funding is common in public schools and government organizations. First, we must define categorical funding. Many states define categorical funding as financial revenue or support from a federal or state source. Categorical funding is specifically aimed to assist in an exact category, program or purpose. There is often restrictions on how a government organization can use these funds.

Let’s review a few pitfalls that categorical funding may have on your organization’s general fund when forecasting employee costs. Often when a government organization is forecasting employee costs the district knows that portions of the revenue will come from categorical funds. When discussing pay increases it is always wise to know which employees are tied to the general fund versus categorical funds, so that accurate compensation increases can be given in a balanced manner.

Discontinued Funding

The first pitfall that is common is building an additional layer of compensation for all teachers with a categorical fund. Often a district will give all teachers a flat amount annually based on a categorical fund that becomes available. Some states will issue a categorical funding mechanism instead of giving a per pupil revenue increase. Beware when setting up compensation using categorical funding. Employees must be aware that categorical funding is being used to give them the flat salary increase you are proposing. Communication is key when compensation employees using categorical funds. Why? The state or federal source of the categorical fund can end this categorical fund when budgets are tight. When categorical funding ends and a district has been using it for compensating employees, there are two paths forward. The first path forward is ideal. Communication has been open and transparent with all employees receiving the categorical funding. Removing the compensation will cause complaints, but there should be open dialogue from the beginning that the funds were temporary. When categorical funds are removed, even if clear communication practices are in place, will often cause for a tougher negotiations cycle. The second path is when communication has not been open. The district can’t just rip away thousands of dollars of compensation for the simple reason of, “Sorry, we lost funding.” Normally what happens is the district swallows the categorical funding loss and the General Fund bears the burden of the additional costs. Normally negotiations with these employees will still be difficult as you must explain what happened and the limits your General Fund can withstand. Always clearly communicate with employees about how categorical funds are being used, and the temporary nature of the funds.

Excess Expenditures

The second pitfall is excessively spending more than the categorical fund permits. Categorical funds are supposed to be viewed as supplementing expenses. Not properly projecting your employee costs for that categorical fund will leave the General Fund picking up the remainder. While this is common sense, the proper categorical and General Fund compensation projections were not completed prior to the start of the fiscal year. When employee expenses are then tied to each categorical fund, the district is often left with “picking up” the categorical deficit. Most districts have 10–15 categorical funds, and if each categorical fund has a deficit, then the General Fund must pick up the expenses. As was stated earlier, categorical funds are supposed to supplement expenses, not supplant expenses.

Categorical Projections

When you begin building your employee costing model for the new fiscal year, look beyond the General Fund and begin projecting how employee costs will impact your categorical funds.