On Monday night, the Mankato Area School Board approved the beginning phases of a multi-million dollar budget reduction.

Due to a combination of economic and legislative factors, the district finance committee is projecting a $3 million deficit in school year 2009-10. In terms of raw dollars, that shortfall — which is about 5 percent of the district’s roughly $60 million general fund budget — is the largest in school district history.

In response, the board unanimously approved a motion calling on district administrators to draft a budget adjustment proposal.

Two public forums on the budget reductions will be held in December — 6:30 p.m. on Dec. 8 at East High School and 6:30 p.m. on Dec. 11 at West High School — and the School Board will host a public hearing on the reduction proposal in March before adopting a final plan on April 6.

“This is a tough process,” said board member Dave Sunderman, who also sits on the finance committee. “There is nothing fun about it. We just try to do it diligently and use all the resources we have at hand.”

According to numbers from the Minnesota Department of Education, the consumer price index has held an average increase of 3 percent each year since 2003. During the same period, however, state funding has averaged only a 1 percent yearly increase.

But in addition to not keeping up with inflation, state funding is also failing to keep pace with rising expenditures.

Supt. Ed Waltman said the district is now contributing more than $4 million to cover unfunded special education mandates. According to MDE numbers, the state funds special education at about two-thirds the cost.

But transportation costs and commodity prices are also rising. So, too, are the costs of employee health benefits and retirement benefits. And, of course, teacher salaries increase every year.

As a result, the district has been steadily draining its reserve fund in order to meet rising expenditures. At the current pace, district business manager Jerry Kolander predicted the reserve fund would reach a nearly $900,000 deficit by June of 2010.

District policy states that one month’s expenditures — about $5.7 million — be kept in reserve at all times.

“A lot of this is proactive,” Kolander said. “We just don’t know what the state Legislature is going to do. I do know that if they came up with an inflationary increase, we wouldn’t be cutting $3 million.”

With the state facing a multi-billion dollar shortfall, the district’s budget projections are based on the assumption that the state will not increase funding in the next session. But school districts will not know for sure until the K-12 omnibus budget bill is passed sometime in May 2009.

Mankato schools, however, begin planning classrooms and programs months before that, leaving officials with the unenviable task of predicting legislative outcomes.

“We can’t wait until May to make our plans,” Waltman said. “But no matter what we say, this plan will be painful.”