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On Dec. 5, the Citizens Ad Hoc Budget Committee presented its report to the District 65 School Board, laying out potential ways to address the District’s projected operating deficits and to plan for the long-term financial stability of the District. The District is projecting that it will have an operating deficit of $3.3 million for the 2012-13 school year and that the deficit will grow to $8.7 million by 2015-16.

The 26-member Committee met seven times since Sept. 6, and a drafting subcommittee spent substantial additional time preparing the report. The members brought a variety of skills and experiences to the table, including financial, management and economic expertise.

Mark Sloane, chair of the Committee, said a key finding of the Committee is that there is a “structural imbalance” between the rate of increase in the District’s operating revenues and the rate of increase in its operating expenditures. He said the “primary drivers” of the structural imbalance are 1) “the relatively slow rate of growth of property tax revenues” that are subject to tax caps and account for about 80% of the District’s total operating revenues, and 2) the “relatively fast rate of growth of salaries and benefits” that comprise approximately 80% of the District’s operating expenses.

He used the District’s projections to exemplify the imbalance. Property tax revenues are projected to increase from $82.1 million this year to $85.8 million in 2015-16, a 4.5% increase.

During the same period, salaries are projected to grow from $72.2 million to $81.5 million, a 13% increase; and benefits are projected to grow from $14.7 million to $19.9 million, a 35% increase.

On a combined basis, salaries and expenses are projected to increase by 17%, compared to a projected increase of 4.5% in property tax revenues.

The report says District 65 is facing many of the same problems as other school districts in the state, and that part of the structural imbalance is due to an 11% increase in student enrollment in the last five years; and the District is projecting that enrollment will increase 3% in the next five years.

The Committee presented 30 “potential solutions for consideration” by the School Board to address the structural imbalance.  Many of the potential solutions “mirror steps being taken by institutions elsewhere in the public and private sector to adjust to economic challenges,” says the report.

Committee member Therese McGuire said the Committee did not include in its report estimates of the cost savings attributable to any potential solution; but it is anticipated that District administrators will do so in the future.

Salary Structure and Benefit Costs

Alex Granchalek, a member of the Committee, said the District should consider ways to reduce the rate of growth in the “large expenditures” to bring them in line with the rate of growth in revenues. “Any solution has to attack the structural deficit,” he said. He focused on salaries and benefits which comprise 80 percent of the District’s operating expenses.

He said the Board should consider ways to structurally reduce the rate of salary growth. Some potential ways identified in the report include setting salary expenses for the coming year based on projected revenues, limiting overall salary growth to revenue growth or the Consumer Price Index (CPI), whichever is lower, or tying raises to the CPI. With some exceptions, property taxes for operating revenues are limited to the increase in the CPI or 5%, whichever is less.

Changes in salary structure would need to be negotiated with the District Educators Council (DEC, the teachers’ union) and other employee groups. Negotiations for new collective bargaining agreements, which expire in August 2012, are expected to begin in February.

The Committee also proposes a number of ways to reduce the growth in the cost of providing employee benefits. Some of the ideas include negotiating “wellness initiatives” with health-care providers to reduce plan costs, ensuring that all beneficiaries are in fact qualified beneficiaries under the plan, and incentivizing employees who are covered under a spouse’s plan to “opt out” of the District’s plan.

Other possibilities include reducing the scope of coverage options, reducing  benefits for new hires,  reducing the District’s contribution to the plan, and offering a health savings account with higher deductible plans.

Some of these suggestions would also need to be negotiated with unions of employee groups.

Jean Luft, president of DEC, told the RoundTable, “The District 65 community is currently served by a staff of highly qualified and outstanding educators. The challenge during this year’s negotiations will be to work in the budget to keep salaries and compensation competitive to retain and attract the best teachers and staff for the children of the Evanston/Skokie community.”

Leverage Resources To Reduce Staffing Levels  

The District has 680 instructional staff and 475 non-teaching employees. “To the extent possible, the District should utilize attrition – not filling positions vacated due to retirement, relocations or other reasons – as a tool to reduce the number of employees,” says the report.

Two ways identified as possible ways to reduce staffing levels are to adhere to the District’s class-size guidelines which may increase class sizes by two or three students and thereby reduce the need for some teachers, and to reduce the level of support staff (such as school psychologists, social workers, and speech pathologists) to  levels recommended by national standards.

While these possibilities are included in the report, Ms. McGuire said, “There was a sincere concern about increasing class sizes.”

Other suggestions include that the Board consider the feasibility of merging with School District 202 “to save duplicative costs while enhancing educational opportunity,” and to seek support in the classroom from Northwestern or other institutions of higher learning. 

Other Revenue Enhancements And Expense Reductions

Ms. McGuire summarized 15 other possible ways to increase revenues or reduce expenses. Some of these include seeking philanthropic support from charitable organizations and seeking a payment in lieu of taxes from Northwestern University. She said Stanford, Brown and Dartmouth have made payments in lieu of taxes to school districts.

Another option is to ask voters to approve in a referendum an increase in property taxes over and above the tax cap amount. This would increase the base level of property taxes in the year approved, and the base amount would thereafter grow as permitted by tax caps. She said this possibility generated the most discussion by Committee members.

Board Members Reactions

Many Board members said they were impressed by the report and thanked the Committee for its work. Kim Weaver said, “There’s a lot of good ideas in here.”

Richard Rykhus suggested that the ideas be separated into two groups, those that are subject to contract negotiations with the unions, and those that are not. He asked that administrators provide information to the Board about the ideas that are not subject to negotiation and make recommendations about which ones the District should pursue and focus its efforts on in preparing the budget for 2012-13.

Superintendent Hardy Murphy said he would like staff to be able to react to the report and to assess how the Committee’s ideas can be helpful in the budget process.

Katie Bailey, Board president, suggested that administrators present its reactions to the Finance Committee next week and identify the ideas that would be applicable for the coming year’s budget. Dr. Murphy said staff would be able to present information to facilitate an informed discussion at that meeting.

Andy Pigozzi, chair of the Finance Committee, said, “I think we’re all anxious to get our arms around this.” He added, “The structural problem is not a surprise. … I’m not envisioning something that’s going to make our structural problem go away, it might lessen it a little bit.

Some Key Assumptions

The Committee assumed that the budget projections prepared by District 65 staff are accurate and that they do not substantially overstate future revenues or expenses. Key parts of the projections are based on assumptions. For example, as a general rule, property taxes (which account for 80% of the District’s operating revenues) are subject to tax caps which limit the increase in property taxes to the increase in the consumer price index (CPI) or 5%, whichever is less. The CPI applicable to the 2012 tax levy and subsequent years is currently not known. In addition, the District’s collective bargaining agreements with its employees expire in August 2012, and there is thus no agreement that governs salaries and benefits (which account for 80% of the District’s operating expenses) after that date.

The District’s projected deficits do not include the incremental operating expenses that will be incurred if the District establishes a new school in the central core. The administration estimates that a new school would add about $500,000 in incremental annual operating expenses. The Committee concluded that the new school was beyond the scope of its assignment.