Kathy Zalewski, business manager of District 65, presented updated financial projections for the District at the School Board’s meeting on Feb. 17. The new projections forecast higher operating deficits than were projected four months ago, due in large part to a lower consumer price index (CPI) for 2014 than was anticipated four months ago.
“We’re facing a time where we’re going to have limited resources to do the work that we’re going to have to do,” said Superintendent Paul Goren. “We’re going to have to be prudent in how we base our budgets and do our expenditures.
“We’re doing everything we can to manage our resources in a prudent way,” he continued. “That said, there’s a financial cloud hanging over the District.”
Property tax revenues are subject to tax caps, which limit the amount by which District 65 may increase property taxes to the lesser of the increase in the CPI or 5%. Because property taxes account for almost 80% of the District’s operating revenues, the CPI is a key driver of the budget.
In its projections made four months ago, the District assumed the CPI would be 2% each year for the next five years, but 2014 came in at 0.8% – a “devastating” CPI, said Ms. Zalewski.
Ms. Zalewski said District 65 will feel the effects of the 0.8% CPI in fiscal year 2016-17, and it will reduce projected property tax revenues by about $1.5 million for that year. Because of the way tax caps operate, a reduction in tax revenues in one year carries through to each succeeding year, although the impact in succeeding years will be less than $1.5 million.
Ms. Zalewski said the projections assume that the CPI will be 2% for 2015 and subsequent levy years. This is slightly less than the 2.1% recommended by PMA, the District’s consultants.
Another key assumption is the increase in salaries and employee benefits, which account for about 80% of the District’s operating expenses. The projections assume that salaries will increase by 4% for fiscal year 2015-16, which is the final year of employee contracts. After that the projections assume that salaries will increase by 3.8% each year. Ms. Zalewski said the actual increases “will need to be negotiated” with the employee groups. She added, that health insurance is projected to increase by 7% for fiscal year 2015-15, and then by 5% after that.
Using these and other assumptions, the District is projecting that it will operate at the following deficits in the next five fiscal years:
The Structural Deficit
“The big concern here is we have a structural imbalance, with a 2% CPI and a 4 to 5% increase, on average, of all the major expenses,” said School Board member Candance Chow. “It does not compute.”
Ms. Chow and others questioned whether using a 2% CPI was being overly optimistic. Ms. Zalewski said the District’s consultants were recommending using a 2.1% CPI, and District 65 was taking a more conservative approach.
Dr. Goren said, “Suffice it to say, we’ve got a structural deficit embedded in the budgets that we look at over time, and it behooves us as we prepare for the next coming years to bring to the Board and the public what we see as our best efforts to maintain programs and to maintain all of our efforts, but to reduce, to make reductions, so that’s our challenge over the next couple of months.”
Undertainty in Springfield
Legislation either pending or proposed in Springfield creates uncertainties and could have a substantial adverse impact on District 65’s operations:
• The State raised the income tax to 5% several years ago, and the tax was automatically reduced to 3.75% on Jan. 1. If the legislature does not raise the rate, it will likely reduce the amount the State has available to fund education. The State’s funding of the District’s early childhood program could run out by the end of February.
• Senate Bill 1, which is a revised version of 2014’s Senate Bill 16, is pending. SB1 does not increase State funding for education, but revamps the way the State allocates its funding to school districts. While the State has not yet estimated the impact of SB1 on individual school districts, if it passes, “”We’re going to be losing money,”” said Ms. Zalewski.
• The State is considering the degree to which the cost of funding teacher pensions may be shifted from the State to local districts, such as District 65. Ms. Zalewski said the District’s financial projections assume that District 65 will be required to pay an amount equal to 0.5% of teachers’ compensation into the pension fund, or about $400,000, starting in 2016-17, and that the payment will increase to 2% over the next three years. There is no assurance that the pension shift will be limited to that amount, and the amount may increase significantly if pension reform legislation enacted last year is held unconstitutional by the Illinois Supreme Court.
• In his State of the State speech, Governor Bruce Rauner proposed a two-year freeze on property taxes. If that were done, it would increase projected deficits by millions of dollars each year going forward.