While waist-deep in budget problems, Ann Arbor school officials are working to open a new high school in the fall of 2008.

With each proclamation about the need to cut $11 million from the district's budget and reduce staff by 104 positions, questions from parents arise about how the district will be able to afford to run the new school.

Critics say the district can't afford it and claim school officials knew that back in 2004 - before the public voted to approve the school - when internal documents and e-mails show they had long conversations about the size of the deficit, how the district would pay for the new school, and how the flow of information to the public should be managed.

School officials see it differently. They say they are as confident as ever that a shift of capital expenses to a $235 million bond and $35 million sinking fund, both passed by voters in 2004, has freed the $3.8 million needed to run the new school.

So who's right?

That's not likely to be known until the books close on the 2011-12 school year, the first year the new high school will have a full complement of students and staff.

For the district's predictions to come true, voters will have to continue to pass millages - either as bonds or sinking funds - to continue to pay for capital needs when the current one-mill sinking fund expires in 2009. Enrollment will also have to climb, something district officials believe will happen when the new school opens. Growing enrollment would help the district's financial picture because the state provides a certain amount of money - this year $9,409 - for each student.

Two views

Alan Pagliere, a frequent critic of the district who lost a lawsuit to stop the construction of the high school, used a Freedom of Information Act request to get hundreds of e-mails and documents from the district about new high school operating costs. He said those documents back up his claims that the district knew in 2004 that they didn't have the money to operate the new school.

"Did they go into this knowing they weren't going to be able to pay for it, or thinking they really could? Either that's deceitful on one hand, or not doing your homework on the other hand,'' he said, adding he will post the e-mails on his Web site that is critical of the district, www.proposedhighschool.org. "The administration talked about the looming financial crunch before the bond was passed, and yet they went ahead. It seems they packaged it optimistically. ''

He still doesn't think the district has the money.

Parent Craig Tower, who has two children in the district, agrees with Pagliere.

"You're making all these cuts because you don't have enough money and then you're going to hire new teachers for a new school. It doesn't make sense.''

School officials say Tower and Pagliere are wrong. They said they carefully reviewed the numbers, came up with a plan and told the public about it. They say the plan will still work, even in the light of tough budget times. They even go one step further and say the plan has helped the district avoid even tougher financial times.

"We've used $7 million (money that was spent from the bond/sinking fund for capital projects originally paid for by the operating budget) over the last two years for the general fund,'' said Superintendent George Fornero. "The bond has helped us bridge the last two years. The budget problems we're having now would have been worse without it.''

The projections

In early 2004, as school officials prepared for a key school board vote on whether to ask voters to approve a bond and sinking fund to pay for the construction of the new high school and a host of other projects, they tried to come up with a total picture of the district's financial health and the cost of operating the new high school.

District officials talked to Walled Lake, Rochester and Plymouth-Canton school officials about their experiences in opening schools and did extensive planning, including projections of staff and student schedules to arrive at the projected $3.7 million cost, Fornero said.

In the latest projections, done this February, that has risen to $3.8 million, Fornero said.

At the same time, administrators were looking at the district's overall financial picture.

Two sets of numbers surfaced, documents show.

The first, prepared by the district's finance office in January 2004, used conservative projections that showed revenue of $170.88 million, which led to a budget shortfall of between $7.8 million and $19.43 million by the end of the 2007-08 school year. The business office also projected a decrease in enrollment each year down to 16,531 students during the 2007-08 school year.

School Board Member Glenn Nelson, who was then the board's treasurer, was much more optimistic in his projections. He believed the finance office was underestimating gains in enrollment and the revenues available to the district.

On Feb. 2, 2004, Nelson projected revenues around $176.5 million for the fall of 2007. He did so by projecting a flat enrollment of around 16,635 students. Actual counts show enrollment for this school year of 16,885.

"I've always been more optimist than business services. I still am,'' he said. "I'm a middle-of-the-road projection guy. I have argued for higher enrollment projections.''

The more positive assumptions seem to have won out in the internal process.

"What appears to happen is they begin to use more optimistic assumptions,'' said Karen Sidney, an attorney and CPA who has reviewed the documents Pagliere obtained. "It seems to me that information to the (school) board was massaged to get the most optimistic views.''

Ultimately, administrators projected revenues of $176.7 million for the 2007-08 school year when they sought the first of three approvals needed from the school board to go forward with the proposed high school project. The projection showed a deficit of $13 million at the end of that school year.

Nelson said that so far his revenue projections have turned out to be more accurate than those of business services. Actual revenue in the 2005-06 school year is now expected to be $175.11 million, or $11 million more than the numbers used by the business office in the Jan. 29, 2004, projections. His revenue projections were slightly higher than what's actually come to pass.

Managing the message

E-mails reviewed by The News show that school officials worked hard in the time leading up to both the board and public approval of the new high school to make sure their message about the district's overall financial picture got out. School critics question whether that message contained all the information that it should have.

"We didn't see purely factual information - we got a sales pitch,'' Sidney, Pagliere's attorney, said.

An e-mail dated Feb. 8, 2004, from Peter Ways, who was then the district's administrator for special projects, to Fornero illustrates that pitch, Sidney said.

Ways outlined the financial details to be included in a packet to school board members in preparation for a vote on the bond/sinking fund projects. He stressed that Nelson, with his more optimistic message, should be the primary person to talk about the financial picture, rather than Orma Lapp, the district's deputy superintendent for business services. He also suggested that the district should not let Lapp talk to Ann Schimke, The Ann Arbor News reporter assigned to cover Ann Arbor schools at the time.

"It is up to Glenn, at this point, to interpret the projections, to make meaning out of them, to help you allay the concerns of other trustees and to speak publicly to them Wednesday,'' he wrote. "What happens to this financial picture with and without the bond? This is the critical piece. We can demonstrate that it is BETTER financially with the bond, WORSE without. That's really all that needs to be said. At this point, I think Glenn should be in the $ seat. Orma has had her say. By the way - I don't think this needs to get big in public unless Ann S. (Schimke) gets ahold of it. I know she has the packet, but I think if we are ready to respond to her with the talking point above, to send her to Glenn, to forbid Orma from talking to her, etc. we will be fine.''

Fornero responded a short time later.

"I tend to agree that Orma has had her say,'' he wrote. "Glenn is frustrated, too. My fear is that we'll attempt to present a positive spin on this when in reality, that may not be the case.''

Fornero went on to say he didn't want to get caught in an "Enron'' situation where if optimistic projections didn't turn out, people would say, "I told you so.''

In a recent interview, Fornero said he did not forbid Lapp from talking to Schimke and that Fornero himself met with her before the meeting to go over the overall financial picture. Information about the overall financial picture was also included in a February 2004 packet to the board that was also available to the public.

The issue of how much the bad overall financial picture should be brought up came up again as school officials attempted to craft a talking point to be used with the public.

A consultant came up with a statement that ended "these are three examples of how the passage of the bond will improve the financial health of the district, no matter how tight operating budgets get.''

Fornero e-mailed to say he didn't like the last phrase. On Feb. 17, 2004, Nelson also weighed in.

"If I understand George, I think I agree with him,'' Nelson wrote. "Delete the trailing 'no matter how tight operating budgets get.' This is true, but it just brings needless attention to a separate issue that is stressful. Mere association with bad things leads to bad feelings. ...''

Fornero said that it wasn't a secret before the bond passed that the district was in tough financial shape.

"That was my talking point all along,'' he said.

At a recent meeting of school officials and community leaders, Fornero admitted that discussion might not have been heard by the community, especially because the district had a healthy savings account, which it used for several years to balance the budget.

"It masked the problem,'' he said. "No one felt it, it wasn't real.''

Current questions

The problem is real now. The district is projecting that if it doesn't make cuts, it will use all of its savings account by the 2008-09 school year. It needs the account to cover unanticipated expenses and also for cash flow, especially in the summer months while it awaits state aid payments.

Fornero has announced a plan to cut more than 100 positions and a total of more than $11 million over the course of the next three years.

Those cuts have led some parents to question whether the district will have enough money to run the new school when it opens in the fall of 2008.

"If they are getting rid of positions, how can they afford a new school?'' asked Rick Olson, a parent of three children in the district. "I don't get it.''

Fornero said that because the new school is just shifting much of what the district is doing to three buildings instead of two, most of the costs will be the same.

The district has identified $3.8 million in additional costs for about 18 teachers, more maintenance workers and costs.

Olson said he doesn't understand how the district will hire new teachers if it is cutting teaching positions now.

Fornero said specific teachers will be hired as needed.

"When the new high school opens, we're going to hire for specific positions,'' Fornero said. "We're going to hire teachers for specific positions this year. For example, the Pioneer orchestra teacher is retiring. We are filling that position.''

Plus, school officials remain confident they have enough money because they have shifted capital costs that include bus purchases and maintenance into the bond and sinking fund and away from the general operating budget.

"The money is there now,'' Fornero said. "Once we made the shift, that's there in perpetuity. You just need to find a source for capital needs. We did the shift because we knew if we didn't do anything we'd have serious budget problems.''

Nelson agreed.

"We have enough money,'' he said. "The bond and sinking fund has been helpful to the budget. We would have to be cutting $3.5 million more this year than we are now doing if we didn't have it. There are a lot of people working to empower children that would not be employed if the bond had not passed.''

Plus, Nelson said, the district is likely to draw additional students, and the state per-pupil funds that come with them, once the new high school is open.

"The facility will, I believe, attract more people to the district than trying to market large, overcrowded schools.''

David Jesse can be reached at djesse@annarbornews.com or at 734-994-6937.