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On Feb. 10, District 65 administrators presented financial projections to the Board’s Finance Committee that show deficits mounting at a much higher rate than projected four months ago on Sept. 16, 2013. The latest projections show a surplus of about $17,000 in 2014-15 and then deficits of $4.7 million, $6.9 million, $8.7 million and $11 million in the subsequent four years.

The vast bulk of the increase in the projected deficits is due to two factors: first, a reduction in projected property tax revenues; and second, an increase in projected expenses for benefits, which include health insurance and pension costs.

Property taxes account for almost 80% of the District’s revenues. Salaries and benefits account for more than 80% of all operating expenses. Between this year and 2018-19, property taxes are projected to increase by 11.8%. On a combined basis, salaries and benefits are projected to increase by 20.3%.

A little over two years ago, a Citizens Ad Hoc Budget Committee presented a report to the District 65 School Board, laying out potential ways to address the operating deficits that were projected at that time. The Committee found there was a “structural imbalance” between the rate of increase in the District’s operating revenues and the rate of increase in the operating expenditures. Simply put, salary and benefit were increasing at a much faster rate than property tax revenues.

While the District made substantial cuts two years ago, the “structural imbalance” has continued. The imbalance is, in fact, magnified due to low CPIs in the last two years and to potential shifts of pension costs from the State to school districts.

Property Tax Revenues

School districts’ ability to increase property taxes is limited by state tax caps, which generally limit the increase to the CPI or 5%, whichever is less. Low CPIs in the past six years has put a strain on school districts across the State.

Kathy Zelewski, comptroller, said the CPI for 2013 came in at 1.5%, rather than the 2.5% that was assumed in the Nov. 2013 projections.  In practical terms the difference will cost the District approximately $1 million in 2015-16 and in each subsequent year.

In light of the low CPI for 2013 and the relatively low levels in the prior five years (0.1%, 2.7, 1.5, 3.0, 1.7), Ms. Zelewski said she assumed for purposes of the latest projections that the CPI for 2014 and subsequent years will be 2.0%, rather than the 2.5% assumed for the November projections. This change also significantly reduces projected revenues for 2016-17 and the years that follow.

The impact of a lower CPI is $1.1 million for 2015-16, $1.4 million for 2016-17 and $1.6 million for 2017-18.

Salaries and Benefits

The District’s salary expense is projected to increase due to higher rates of compensation and an increase of 373 students during the next five years. Between this year and 2017-18, salaries are projected to increase from $73.9 million to $86.2 million, or by 16.5%.

The teachers’ contract expires at the end of the 2014-15 school year. The District’s projected expenses after that are thus based on assumptions about rate increases.

The projected increase in the expense for employee benefits is a shocker. The increase is from $14.9 million this year to $22.9 million in 2018-19, a 54% increase. The drivers of this are a 10% annual increase for health insurance, a new fee of about $360,000 under the Affordable Care Act, and an amount to cover pension costs.

Ms. Zelewski said legislation has not yet passed that shifts teacher pension costs to school districts, but school districts have been advised to build that cost into their budgets. Thus, the latest projections assume that the State will shift teacher pension costs to the District on a phased-in basis that will reach 2% of teacher salaries by 2018-19. The cost per year is estimated at $0.3 million in 2014-15, and then $0.6 million, $1 million, $1.3 million, and $1.4 million in the subsequent years.

Asked if school districts would be allowed to increase property taxes by an amount over that permitted by state property tax caps in order to cover the shifted pension costs, administrators suggested that was not yet in the cards.

Board Discussion

Board members at the Finance Committee meeting discussed on a preliminary basis how to approach the problem. Lora Taira, chief information officer, presented a schedule showing the savings that might accrue if the class-size guidelines were increased by one student and by two students. The annual savings would be about $666,000 if the class size guidelines were increased by one student, and $900,000 if the guidelines were increased by two students.

Katie Bailey said that, even though the District was projecting a small surplus for 2014-15, reducing expenses starting that year would benefit subsequent years.

Candance Chow suggested that the Board review the report prepared by the Citizens Ad Hoc Budget Committee in December 2011 to determine if some recommendations made in that report were not implemented and might be worthwhile to pursue.

Ms. Chow added that the changes the Board would likely make to address the deficits would be changes that would not only impact a single year, but subsequent years. “We need to have some guiding principles around that.” The strategic planning process scheduled for next fall “would help us in terms of prioritization and focus,” she said. “What I wouldn’t want to happen is to see us go down a path of making changes structurally to the budget that were totally separated from that other conversation.” 

Suni Kartha added that the Board was in the process of finding a new superintendent “who really should be part of all this discussion.” She questioned if class sizes were increased, would that increase the need for aides for students with an IEP, and whether classrooms were large enough to accommodate an increased number of students.

Tracy Quattrocki said it was hard to evaluate a potential increase in class sizes in isolation from other budget reduction strategies. Increasing class sizes “goes to the heart of instruction which is concerning to me,” she said. “I would love to see this within the context of other strategies that hopefully might be starting away from the classroom a little bit more.”

Several administrators and Board members noted that some schools have smaller class sizes than others, which raises a question of equity and staffing efficiency. Several Board members suggested that the District look at whether class sizes at the magnet schools could be increased to bring them in line with other schools, whether a TWI strand might be eliminated, and whether redrawing school boundaries might offer a solution.

Other suggestions put on the table in the brainstorming session were to continue efforts of “virtual consolidation” with District 202, evaluate whether expenses for consultants could be reduced, analyze the cost of tests and assessments and the trends, consider increasing student fees, ask Northwestern University to make a payment in lieu of taxes

On a related note, the Finance Committee authorized administrators to retain a lawyer on a contingent fee basis to file suit against persons who owe a substantial amount for childcare fees, who did not qualify for free- or reduced-fee lunch, and who have been non-responsive. “I have such a strong opinion on this,” said Committee Chair Richard Rykhus. “I feel [the failure to pay is] a real injustice to the families and kids who are doing what’re supposed to be doing.”

A Referendum in the Offing

Mr. Rykhus said, “One option that we could look at is an operating referendum.”

He added, “What strikes me different about this projection is that as we’ve gotten closer in other years the dollar amounts has seemed more manageable, like there might be more opportunities to find efficiencies in the system. When I see numbers like $5 million and $6 million, it strikes me as more difficult. It doesn’t mean it can’t be done, but it’s a different type of number.”

Ms. Zelewski said the District has made cuts before to address projected deficits and has squeezed out efficiencies with respect to every line item. “There’s not much out there,” she said.

Chief Financial Officer and Superintendent Mary Brown said an operating referendum, if successful, would allow the District to raise property taxes to cover operating expenses over and above that permitted by property tax caps.

In order for an operating referendum to help out with the deficit projected for the 2015-16 school year, though, it would have to be scheduled for the Nov. 4, 2014 election. The next possible date after that is the April 7, 2015 election at which School Board members are elected. Any increase approved in the April election would impact the 2016-17 school year and beyond.

Dr. Brown also discussed a referendum to approve funding for certain capital projects. On a number of occasions during the last year, Dr. Brown has identified building projects, including roofing and masonry, life safety, and other projects, that substantially exceed the amount the District can access under its Debt Service Extension Base without a referendum.

Next Steps

Mr. Rykus asked administrators to present recommendations of budget reduction strategies at the Finance Committee meeting in March, and to lay out the cost savings, the potential impacts, and the pros and cons of each strategy. As an example, he said, “When you increase class size, there’s other impacts you might not immediately think about. So what are those negative impacts?”

He asked administrators to present an analysis of a potential operating referendum and a capital projects referendum at the Finance Committee meeting in April, and to recommend the amount that would be requested, to specify the uses for the additional funding, and an estimate of the cost to the average home owner.