On Aug. 10, the Finance Committee of the District 65 School Board decided to recommend a tentative budget for fiscal year ending June 30, 2016 (FY’16). Operating revenues are projected at $111.6 million, up 3.7% from the prior year. Operating expenses are projected at $110.3 million, up 3.3% from the prior year.
The operating budget for FY’16 has an operating surplus of $1,207,104, said Kathy Zalewski, business manager for the District. The District is able to report this surplus due to significant staff reductions and cuts in non-personnel expenses totaling about $2.3 million. The plan is to use $1 million of the surplus to prepay expenses in FY’17 and to bring a projected deficit for that year down to about $531,276.
While the budget for FY’16 is balanced and the deficit for FY’17 is brought down to a manageable level through these strategies, the District is still projecting significant deficits in subsequent years due to a “structural” imbalance between revenues and expenses.
The District is working on ways to address that issue.
FY’16 Operating Revenues
On the revenue side, the District is projecting that the property tax revenues it collects for operations in FY’16 will be $84.9 million, up 2.1% over the prior year. The District is limited in raising property taxes by State tax caps which limit the increase to the lesser of 5% or the increase in the Consumer Price Index. For FY’16, which spans two calendar years, the applicable CPI rates are 1.5% and 0.8%. Property taxes make up about 76% of the District’s operating revenues.
Property tax revenues are benefited by about $500,000 due to new property being added to the tax rolls and the expiration of the Southwest TIF which expired last year, said Ms. Zalewski.
State and federal grants, which account for 19% of the District’s operating revenues, are expected to be about $20.4 million, about 6.7% more than last year. The increase is primarily due to two factors: 1) an assumption that the State will make four categorical payments in FY’16; only three were made last year; and 2) District 65 was recently awarded a five-year federal grant for Head Start starting next year, which increases its revenues for that program.
FY’16 Operating Expenses
On the expense side, salaries are pegged at $78.3 million, up 2.7% over last year; and employee benefits are projected to be $14.4 million. Health insurance premiums, which make up a major part of the benefits, are projected to increase by 5.1%. Salaries and benefits, together, account for 86% of the District’s operating expenses.
The budget builds in savings of approximately $1.4 million due to the reduction of 29 full-time equivalent positions that was previously approved by the Board. The District’s student enrollment is assumed to increase by 117 students; and the budget builds in the cost of 3 additional teaching positons to accommodate the increased enrollment.
On a combined basis, the District has been able to cut non-personnel expenses by $910,927 as part of its budget reduction strategies, said Ms. Zalewski. But it was forced to increase transportation expenses by 20% or about $600,000. Non-personnel expenses total about $17.6 million.
Dr. Goren said staff is analyzing ways to improve bus transportation while at the same time reducing costs. He said they planned to seek community input on various scenarios in January.
FYE June 30, 2015
On an unaudited basis the District is showing an operating surplus of $716,453 for fiscal year ending June 30, 2015, and a cash balance of $22.5 million in the operating funds as of June 30, or about 77 days of expenses.
Projected Deficits/The Structural Deficit
The District plans to use $1 million of the operating surplus in FY’16 to prepay expenses for FY’17. This will enable the District to reduce the deficit projected for FY’17 to approximately $531,276. The District is projecting deficits of $3.5 million in FY’18, $5.9 million in FY’19, and $4 million in FY’20.
Referring to these projections, Dr. Goren said, “The combination of reductions and prepayments help us balance for this year [FY’16] and help us maintain an optimism about what we’ll do next year [FY’17], but it really doesn’t address – it kicks the can down the road – it really doesn’t address what we’re calling a structural imbalance that is embedded in our budget.”
Ms. Chow pointed to two factors that contribute to the structural deficit. First, she said the District’s salary expenses are increasing 3% next year, and that without the staff reductions they would have increased by 4.8%. When the growth in salaries, which accounts for 71% of the District’s expenses is 4.8% and the growth in property taxes, which accounts for 76% of the District’s revenues is capped at 1.5%, there is a structural deficit, she said.
Ms. Chow also pointed to the growth in student enrollment, which has increased from 6,098 in FY’07 to 7,333 in FY’16. “If you look at a ten-year horizon, it’s about 20%,” she said. The District has had to assimilate these students during a period in which it has been subject to property tax caps which do not allow tax increases due to increases in student enrollment.
Another factor is the growth in employee benefits, which is driven by increased health insurance costs. In the last decade, the cost of employee benefits has increased by 108%, or about 10% per year.
“What remains clear is that reductions alone will not solve the existing structural deficit in which our expenses continue to outpace our revenues,” said Dr. Goren. He said he convened a small advisory team with expertise in budget and finance to study the District’s finances.
“With the support of this advisory team and our finance department, we are working to prepare a summary and analysis to share as a starting point for understanding our budget reality and discussing our options,” said Dr. Goren. He said he would provide that analysis to the Finance Committee in September and also convene members of the District’s financial sustainability strategic planning committee to engage teachers, family and community members.
Administrators have also provided this year additional budgeting information by department and prepared a draft “Budget-at-a Glance” document. Ms. Chow said these additions “came out of the strategic planning process” and provide information that is more accessible to the community, that is more transparent, and that is “in such a form that we can really make value-based decisions.”
The Finance Committee is scheduled to discuss the structural deficit in September, said Ms. Chow.
Legislation pending in Springfield, if passed into law, would have a devastating impact on District 65’s and District 202’s financial operations. Last year the Illinois Senate passed Senate Bill 16, which proposed to revamp the way in which the State allocates funding for education. The House, however, did not vote on SB16, and it became void at the end of the session.
This year Senate Bill 1, which is patterned after SB 16, was introduced, but it has not been voted on in the Senate. Under SB 1, District 65 would lose approximately $6.5 million on an annual basis, and District 202 would lose $2.2 million. The full loss would be phased in over three years. It appears unlikely that SB 1 will be acted on this year.
On Aug. 5, the Senate passed Senate Bill 318. That bill, if enacted, would freeze property taxes for tax levy years 2017 and 2018; it would repeal in two years the current method used by the State to allocate funding for education; and it would establish a bi-partisan commission to recommend a new method to fund education in the State.
It appears that the thinking behind SB 318 is to reduce reliance on property taxes to fund education in Illinois and to shift to a new method that may rely more on State income taxes, and perhaps be patterned after SB 1. State Senator Daniel Biss (D, Evanston) voted for SB 318. The bill is now pending before the House.
At the District 65 Finance Committee’s Aug. 10 meeting, Candance Chow, chair of the committee, said, “There’s some very significant, huge ramifications should a property tax freeze pass. As you all know, 77% of our revenue comes from local taxes. … I shared our point of view with both our local legislators that we are very local tax dependent and any change that they would make to a funding formula about state funding cuts pales in comparison to what the impact would be for us around a property tax freeze.
“It’s a big unknown right now, but an unknown that would have a huge impact upon our funding,” said Ms. Chow.
On Aug. 10, Kathy Zalewski, business manager for District 65, presented projections showing the impact of freezing property taxes for two years, specifically the 2016 and 2017 tax levy years. The projections show that the District would lose $3.8 million in FY’18, $5.9 million in FY’19, and $4.5 million in FY’20. The impact would be “devastating,” said Ms. Zalewski.
Because District 65 is subject to property tax caps, the impact would continue in future years.
If freezing property taxes is coupled with a revamp of the way the State funds education as is contemplated in SB 318, the impact may be far greater.
In addition, the State is considering shifting the cost of funding teacher pensions from the State to local school districts. Ms. Zalewski 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 per year, phased in over four years. This amount could be higher in light of the Illinois Supreme Court’s May 8 decision holding the pension reform law unconstitutional.