School board members are concerned, however, because the reserve fund has been steadily shrinking in recent years. Despite that, Superintendent Kevin Holt isn't recommending any cuts and is asking the board to hire more support employees.

Estimated expenses for the 2007-08 fiscal year total $131.4 million, and expected revenue is $127.4 million, which includes a 4.5 percent cost-of-living increase in state funding.

At the school board's meeting Tuesday, Gary Hamels, the assistant superintendent of business services, presented the latest budget draft, which the board will vote on June 11.

The expected shortfall, the largest in recent history, can be explained by two main factors, Hamels said. Student enrollment is slowing, and the district must pay rising special-education costs that aren't fully funded by state or federal sources.

Since 2001-02, the district has been gaining more than 500 new students a year, hitting a growth peak of nearly 800 in 2004-05. But Hamels said that for the upcoming year, he's budgeting only for an additional 120 students. He added that he had hoped the number would be closer to 200.

The cost of teaching special-education students is increasing, in part because services for autistic children and for speech therapy are being requested for younger children, some as young as 3 or 4, he said.

Legally, school districts are responsible for teaching special-education students from age 3 to nearly 22, Hamels said. More buses for special-education students also are needed, and some students need aides on the buses, he said.

The district also needs more support employees to reduce the workload in departments such as accounting and technology, Hamels said.

Most of the budget will pay for salaries and health benefits. It includes new employees – among them 10 general-education teachers, eight certificated special-education workers and seven support staff members, such as technicians. It also includes estimated raises, which are being negotiated with the unions, and more money for health benefits, which are expected to increase by 12 percent, or $1.1 million, next year.

Board members said they were concerned about having to dip into the district's reserves.

In addition to a mandated 3 percent, or $3.95 million, set aside for uncertainties, and other restricted funds, the district has an account to cover year-to-year deficits. In 2007-08, that's expected to drop to about $6.1 million.

Board member Sharon Jenkins asked whether the proposed budget could be trimmed.

Holt said any cuts would have to be in the categories of transportation and personnel, but he's not recommending that. He said some local districts have eliminated assistant-principal positions in elementary schools, a move that would make San Marcos district principals become more like managers instead of instructional leaders.

Board member David Horacek said he's worried that while expenses are going up, growth is slowing and the savings pile is getting smaller. He said it wasn't that many years ago when it was $15 million.

Holt said that although growth is slowing, it could pick up again as more housing developments are built. He said the district isn't facing a bleak financial future.

Horacek agreed but said, “I don't want to be overly optimistic or overly pessimistic.”

Linda Lou: (760) 737-7574; linda.lou@uniontrib.com