At the District 65 Finance Committee meeting on May 11, members of the School Board held a wide-ranging discussion on how to address the District’s projected operating deficits, and how to reach a decision about a potential operating referendum and a capital referendum.

If approved by the voters, an operating referendum would allow the District to increase property taxes earmarked for operations, and to raise funds to maintain class sizes, fine arts, reading interventions, and other educational programing. A capital referendum would allow the District to increase the amount of bonds it could issue to pay for capital projects, such as safe entrances to the schools, roof and masonry repairs and certain technology.

Last September, Board members decided to defer an operating and a capital referendum. On May 11, Finance Committee Chair Candance Chow said, “We are reopening the discussion tonight.”

Board members decided to form a budget task force and to gather input from teachers and the community about guiding principles and options to address the projected operating deficits. By the end of October, the Board hopes to have a good picture of the options and whether an operating referendum or a capital referendum are essential to preserve an education system that is desired by the community.

Simultaneously, the District will gather information to assist the Board in deciding whether it should approve an operating referendum, a capital referendum, or both for the March 2016 election or possibly one in 2017.

1. The Lay of the Land

There are a lot of moving parts that impact District 65’s financial future.

a. Operating Deficits

School District 65 is already in the process of addressing projected operating deficits. On March 23, the School Board approved eliminating 29 full-time-equivalent positions for the 2015-16 school year (FY’16) to reduce costs by $1.4 million. Administrators also plan to reduce non-personnel expenses by a net amount of $800,000.

Assuming these cuts are made, Kathy Zalewski, business manager, projects a slight surplus of $23,000 for FY’16, and then deficits of $2.1 million for FY’ 17, $4.3 million for FY’ 18, $6.2 million for FY’19, and $4.7 million for FY’20.

The Board and administrators recognize the projected deficits are due to a “structural imbalance,” where salaries and benefits, which account for about 80% of the expenses, are increasing at a faster pace than property tax revenues, which account for about 80% of the revenues.

Property tax revenues are subject to property tax caps that generally limit the amount that school districts may increase property taxes to the lesser of the increase in the Consumer Price Index (CPI) or 5%. Due to a very low CPI, the District will be able to increase property tax revenues by only 1.5% in FY’16 and by only 0.8% in FY’17, said Ms. Zalewski.

In contrast, in the projections, salaries and benefits are assumed to increase by approximately 3.8%, said Ms. Zalewski. The teachers’ contract expires after FY’16, and teacher salaries are subject to negotiation after that time.

The cuts planned for next year are on top of cuts totaling $3.8 million in FY ’13 and $3.1 in FY ’11 to balance the budgets. In the last eight years, student enrollment has increased by more than 1,100 students. Tax caps contain no adjustment for increased enrollment.

b. Capital Projects

For the past eight years the District has been funding its capital projects through its Debt Service Extension Base (DSEB). These projects have included classroom additions, added cafeteria space, roof and masonry repairs, boiler repairs, technology, and numerous other projects.

The District currently has authority to issue only an additional $3 million in bonds under its DSEB to pay for capital projects, said Mary Brown, assistant superintendent for business services. An additional $2.5 million will become available in each future year.

The amount available is far less than the amount needed to fund the capital projects that the District has identified. For example, the District has identified roof and masonry work in the amount of $23.9 million, which is spread out over 18 years to keep capital costs down in any one year. In addition, the District identified $16 million in projects in its 10-year life safety survey conducted in 2005 that have not yet been completed.

Administrators have identified an additional $50 million in other capital projects including site improvements, replacing ceilings and lighting in the schools, removing asbestos and replacing some floors, upgrading HVAC at certain schools, replacing classroom cabinets, adding cafeterias and creating safe entrances in certain schools. Much of this work is due to the age of the District’s buildings.

At the March 2 Finance Committee meeting, Dr. Brown presented a schedule of projects that the District could afford to fund under its DSEB over the next eight years. She said the capital projects were prioritized and include only roofing and masonry work, replacement of some heating systems, and a relatively small amount for technology.

Additional capital projects cannot be done absent a referendum.

c. Uncertainties in Springfield

Legislation either pending or proposed in Springfield creates additional uncertainties and could have a substantial adverse impact on District 65’s operations. On May 11, administrators referred to three areas:

First, Senate Bill 1 revamps the way the State allocates its funding to school districts. If the bill is enacted, District 65 would lose $6.6 million per year. The full loss would be phased in over three years.

Second, the State is considering shifting the cost of funding teacher pensions from the State to local school districts. Ms. Zalewski, business manager, said the District’s financial projections assume that District 65 will be required to pay on an annual basis an amount equal to 2% of teacher salaries, or about $1.6 million, phased in over four years. This amount could be higher, said Dr. Brown, in light of the Illinois Supreme Court’s May 8 decision holding the pension reform law unconstitutional.

Third, four different House Bills propose to freeze property taxes. If that were done, it would reduce District 65’s projected property tax revenues and increase its projected deficits by millions of dollars each year going forward.

2. Dealing With Operating Deficits

Paul Goren, superintendent, laid out his plans to form a Budget Task Force, composed of eight to 10 people, to provide input on a set of guiding principles to use in deciding where to make cuts, and also to comment on or suggest options to address the projected deficits.

Dr. Goren said he planned to ask some people who served on the Strategic Planning Financial Sustainability Committee to serve on the task force. He suggested that he, Board President Tracy Quattrocki and Ms. Chow could appoint the task force.

Dr. Goren also suggested obtaining feedback from the broader community through town hall meetings. As part of the process, he suggested that the community could be provided the guiding principles, the guideposts, suggestions and the Task Force’s input.

He said he would like to engage the community on the guiding principles and “given the constraints, where should we and how should we look?”

Board members suggested that the Task Force also include some people who served on the 2011 Citizens Budget Committee, people with expertise in grant writing, and that interested community members be allowed to apply to serve on the Task Force.

Ms. Quattrocki suggested that teachers be involved. “I would love to see a teacher task force, some way to engage the teachers about the budget and where they think there are ways to cut. I believe they could help us on this.”

“Maybe a task force or focus groups,” said Dr. Goren.

Suni Kartha suggested looking at the 2011 Citizen Budget Committee report. She said “There was a lot not acted on. I would think looking at that report is a very good starting point.”

Several Board members emphasized it is important to provide meaningful data to each group asked to provide input and to set expectations for each group. Richard Rykhus said it is important to define “what we’re expecting from each group, and what we would do with the different sets of information.”

Jennifer Phillips said administrators “needed to be able to tell people what the ‘major drivers’ are, such as class size increases, contractual changes, cutting back a swath of programs. There are only a few things that are going to come up with $10 million. It’s not a little bit here, a little bit there, because that’s pretty much already been done.”

“I would hope that we’re thinking tactically about a referendum and potential cuts in tandem, and thinking about what information we want to get from different audiences,” Ms. Phillips added.

“I think it’s very helpful to think about the levers that we can possibly pull,” said Dr. Goren. “The levers may be fewer, rather than greater. When you actually think about what is a $2.5 million reduction over the next three or four years, the levers to pull across the District in an equitable way may only be three or four, as opposed to 10.

“The end of that process is pretty concurrent to the decision to put something on the ballot or not put something on the ballot,” said Ms. Phillips.

Ms. Chow said this aspect of work needs to be completed in October.

3. Possible Referendum

In September, the Finance Committee decided to defer considering whether to go forward with an operating or a capital referendum for two reasons, said Ms. Chow. First, the Board wanted to complete the strategic planning process so that any referendum would align with that plan. The Board adopted a new strategic plan in March. Second, the Board felt they would have a better idea what the legislature would do if they waited.

In reopening the discussion, Ms. Chow said she wanted to focus on what criteria should be used to determine which was needed more, an operating referendum or a capital referendum. She asked, “How do we go about choosing one or both, and what information do we need to make that decision?”

In order to place a referendum on the March 2016 ballot, the Board would need to make a decision by mid-December, said Dr. Goren.

Ms. Kartha said she would like to obtain information showing, “if we don’t increase revenues, what does that look like?” On the capital side, “I would like to have a greater understanding of what [projects] are not going to happen.”

Ms. Chow said, “We do need more of a high-level, almost a two-by-two, which says ‘capital, with/without,’ and ‘operating, with/without’ – the order of things that would happen or not happen. Without a referendum, what would it look like? With a referendum, what would it look like?”

Ms. Quattrocki added she would like to see what the projected deficits would look like if the increases in teacher salaries were tied to the increase in the CPI. She thought this would show what part of the deficit is “structural and what part is something else.”

Mr. Rykhus noted that some educational institutions are tying increases in teacher salaries to the CPI.

Ms. Chow suggested some criteria to use in evaluating which referendum was more important: student learning; the impact on a thriving workplace; community support; burden on the taxpayers, and likelihood of success.

Dr. Goren asked about the possibility of running two referenda on the same ballot.

Ms. Chow responded that in the last five years, only one school district did that and both referenda failed.