Two key assumptions used in making the projections relate to 1) property tax revenues, which account for about 76% of all operating revenues, and 2) salaries and benefits, which account for about 81% of the operating budget. For purposes of the assumptions for FY 2014 and ensuing years, the District assumes the CPI (the property tax cap) will be 2.5% and employee salaries will increase by 4 % and benefits by 10 %. The collective bargaining agreements with teachers and other employees expire at the end of the 2011-12 school year.

At its April 18 meeting, the District 65 Finance Committee opened a preliminary discussion on how to plan for capital expenditures and projected operating deficits spanning the next five years. The Committee’s discussion focused on two issues: the potential need for additional classroom space and how that interfaces with the Referendum-New School Committee’s analysis of the need for a new school in the Fifth Ward; and a projected deficit of $5.8 million for the 2012-13 school year.

The Committee will continue considering these issues at its May meeting after considering additional information.

Capital Expenditures

Mary Brown, chief financial officer for the District, presented a memorandum outlining the District’s capital improvement plan for the next five years. The plan estimates capital expenses for building work, classroom additions and technology at between $53 million and $62 million.

Building Work: The plan has tentatively scheduled the following work:

• Placement of secure entrances at 9 schools at an estimated cost of $1.9 million;

• Roof replacement work at 10 schools at an estimated cost of $8.3 million;

•Masonry replacement work at all of the schools and the administration building at an estimated cost of $4.7 million;

• Life safety and infrastructure projects, such as pipe replacement, water heater replacement, lighting replacement, ductwork and insulation replacement, at an estimated cost of $7.8 million; and,

 • Facility projects such as cabinetry, countertops, furniture, paving, washroom renovations, at an estimated cost of $12.4 million.

The total estimated cost of these projects is $35 million over a five-year period.

Classroom Additions: Other capital expenditures include adding additional classrooms to the schools. Dr. Brown said the District has identified the need for a classroom addition at Lincoln School and potential classroom additions at Lincolnwood, Oakton, Orrington, Haven and Nichols schools. Depending on the enrollment projections used, the estimated cost of building new classrooms ranges from a low of $8.8 million to a high of $17.2 million over the next five years.  

The need for adding new classroom space also depends on the District’s assumptions of class size, whether rooms being used for art, childcare or other purposes would be converted to general education classrooms,  whether a school will be deemed to need additional classrooms if it reaches 80 percent capacity, and other factors.

Technology: Technology is another category of capital expenditure. The District has considered expenses for technology as capital expenses if the useful life of the software or hardware purchased is longer than one year.  The District is still working on a five-year technology plan with cost estimates, but has included a five-year cost of $10 million as a “placeholder.”

Committee Discussion: Finance Chair Katie Bailey said the decision about adding classroom space to the schools is related to the work of the District’s Referendum-New School Committee, which is considering whether to recommend that the District establish a new school in the Fifth Ward. That committee, of which Ms. Bailey is a co-chair, is scheduled to make its recommendation in August or September.

Under most scenarios, a new school in the Fifth Ward would need to be approved by the voters in a referendum. Dr. Murphy said the earliest date for a referendum is March 2012.

Board member Tracy Quattrocki noted that in addition to a referendum to approve a new school, the District may need to obtain voter approval to move forward with capital projects that in the aggregate cost more than the District’s available Debt Service Extension Base, which Dr. Brown estimated at about $45 million over the next five years. Dr. Brown said this amount may be less if interest rates increase.

Ms. Bailey asked the administration to present the Finance Committee with a report on the status of discussions of the Referendum-New School Committee and a report outlining on a year-by-year basis the projected classroom needs of the District. She suggested that in May, the Finance Committee begin analyzing the District’s need for classrooms; and that in the fall, it conduct serious discussions on how to address the District’s space needs after receiving the Referendum-New School Committee’s report.

Ms. Quattrocki suggested the Board consider alternative options and have a back-up plan in case a referendum for a new school or a referendum to approve capital expenditures in excess of the Debt Service Extension Base does not pass.

Projected Operating Deficits

In February, the District presented projections that it would have an operating surplus for the 2011-12 school year, and then operating deficits of $5.8 million, $6.1 million, $8.4 million and $10 million in the next four years. The Finance Committee decided it would begin to discuss this spring how to address the projected deficit for the 2012-13 school year.

Dr. Brown presented a memorandum to the Finance Committee to facilitate the discussion. The memo summarized many strategies used in prior years to maximize the collection of revenues and to reduce expenses in a way that would minimize the impact on the classroom. It also listed strategies to address projected deficits.

There does not appear to be an easy answer to address the deficits. When asked if expenses for “purchased services” have been pared down, Dr. Murphy said the District has tightened up these expenditures over the last 10 years, and there is now “no slack.” Kathy Zalewski, controller, said these expenditures are lower now than in 1999.

Ms. Zalewski added that the Consumer Price Index (CPI), which will impact the District’s property tax revenues for 2012-13, has been determined. “This deficit is real,” she said. “There’s nothing there to save us.”

A major contributor to the deficits is the 0.1 increase in the CPI in 2008 and the increase of 1.5 percent in 2010, both of which are below the historial average of 2.5%. 

As a general rule, a school district may increase property taxes, which account for about 80 percent of its revenues, by the lesser of the amount of increase in the CPI or 5 percent. Because of the way property tax rates operate, a low CPI in one year will impact the property tax revenues a school district may collect in each subsequent year.

Ms. Bailey asked the administration to provide an update on the deficit projected for 2012-13 in light of any new developments, and a summary laying out why expenses were increasing faster than revenues. She said the Finance Committee would begin to look at ways to address the deficit projected for 2012-13 in May.

Determining the need for additional classrooms is driven by several key factors, including the projections used in estimating student enrollment and the assumptions used for class size and space utilization.

The District is working with two different sets of enrollment projections. On Feb. 14, School District 65 issued projections that its K-8 enrollment will increase by a total of 370 students in the next five years (measured as the difference in enrollment at the start of the 2010-11 school year and the 2015-16 school year). The projections show a net increase of 44 students at the District’s K-5 schools, and a net increase of 316 students at the middle schools. There are minor fluctuations projected at the magnet schools.

In January 2010, Dr. John Kasarda, a demographer retained by the School Board, issued enrollment projections using three different assumptions concerning the turnover rate in the City’s housing. Under his three scenarios, he projected there would be 50 (his low estimate), 458 (his mid-level estimate), and 775 (his high estimate) more K-8 students in 2015-16 than this year.

Determining whether there is a need for additional classrooms to accommodate the projected increase in students depends on the assumptions used for class size and how space will be used.

A classroom space analysis recently prepared by the District and presented to the Referendum-New School Committee assumes there will be an average of 20 students per classroom at the K-5 grade levels and 25 students at the 6-8 grade levels, that classrooms less than 600 square feet will not be counted, that there will be a dedicated art room at each school, that classrooms currently used for special education will continue to be used for that purpose, that rooms used for childcare will be converted to general education classrooms, and that a school should not exceed “80 percent capacity.”

Another issue is the extent to which the magnet schools can be used to relieve overcrowding at the District’s attendance-area schools

Earlier this year, the School Board approved bids to add classroom space and make other renovations at Dewey and Willard Schools to accommodate projected increases in enrollment at those schools. With the Board’s approval, the District retained TMP Architecture to facilitate discussions and develop design options with the Lincoln School community to add classrooms at that school. The District is projecting that Lincoln’s enrollment will increase by 128 students by the 2015-16 school year.

Simultaneously, District 65’s New School-Referendum Committee is analyzing whether there is a need for a new school and whether to recommend that the District establish a new school in the Fifth Ward.