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The Finance Committee of the District 65 School Board listened to a presentation on the District’s “structural deficit” at its Sept. 8 meeting. The purpose was “to educate ourselves,” said Candance Chow, chair of the Finance Committee, who said it was the first of a series of meetings that would ultimately get to the point of “what do we do about it.”

Paul Goren, superintendent, said he reached out to members of the District’s financial sustainability strategic planning committee to seek their input on the structural deficit. Two of them, Therese McGuire, professor and chair, management and strategy department, Kellogg School of Management, Northwestern University, and Andrea Mainelli, senior advisor to Tyton Partners and a principal of Charlestown Advisors LLC, spoke at the meeting.

 Dr. McGuire explained, “You have a structural deficit if the trend in the growth rate of expenditures is faster than the trend in the growth rate of revenues.”

“The only way to solve a structural deficit,” she said, “is to bring up the growth rate of your revenues or bring down the growth rate of your expenditures, or a little of both.”

Balancing a budget by making cuts that do not bring the growth rate of expenses in line with the growth rate of revenues will not solve the problem, but may simply leave the district in the position of making cuts year after year.

Ms. Mainelli said, “Unless the structural deficit is tackled and solved, the level of spending will be a painful thing you’ll have to do year after year after year.”

The District is budgeting an operating surplus of $1.1 million for the 2015-16 school year (FY’16), after making significant staff reductions and cuts in non-personnel expenses totaling about $2.3 million. The plan is to use $900,000 of the surplus to prepay expenses in FY’17 to bring down the projected deficit for that year to $731, 866.

Due to the structural deficit, the District is then projecting operating deficits of $3.6 million in FY’18, $6 million in FY’19, and $4.4 million in FY’ 20.

The Structural Deficit

Dr. Goren said the District’s cost for salaries and benefits is increasing at a faster pace than its property tax revenues, which are subject to State imposed property tax caps. This is a recurring pattern.

Dr. Goren listed three main drivers of the structural deficit.

First, with some exceptions, the District may increase property taxes by 5% or the Consumer Price Index (CPI), whichever is less.  In the last ten years, the CPI has averaged 2.15% per year. In the last five years, it has averaged 1.88%; in the last 3 years, it has averaged 1.33%; and in 2014, it was 0.8%, said Dr. Goren.

“The limit is the CPI, and as that has gone down precipitously from 2012 to 2014, it’s a deep concern as we move forward,” he added.

Second, in the last ten years, student enrollment has increased by a total of 1,016 students, or by 18%. Dr. Goren said this has led to an additional $15 million in expenses over last ten years, but that the District only receives about $350,000 a year in new property taxes.

Third, the increase in salary costs has frequently exceeded the CPI, and has done so consistently since 2012, Dr. Goren said. The increases budgeted for the 2015-16 school year are 4.51% for teachers, 3.67% for teacher assistants, 3.65% for administrators, 3.48% for secretaries/clerical, 3.13% for custodial/maintenance, and various other rates for other job categories.

The take-away is that the growth rate of salaries for all job categories is higher than the CPI, he said.  

Salaries have often been governed by contracts negotiated between the District 65 School Board and the District Educators Council (the teachers’ union) and other employee groups. The contract with DEC expires at the end of this school year.

Board Member Comments

Claudia Garrison asked, “Are we saying that what we should really be doing is just making sure our employees keep level with inflation?”

Dr. Goren said, “I don’t know the answer to that. I think we have to pay attention to where the CPI is and have some way if we look at our curves … as the CPI shifts, our salary structure should shift accordingly.”

Ms. Garrison responded, “Then if you factor in things like incentive pay and rewards for performance and all that, that kind of throws that out the window.”

Dr. Goren replied, “But what’s the goal here. The goal is about addressing the structural deficit and what are the causes and drivers of the structural deficit. We’ve got to be sensitive to all that. But we still have to look at the CPI because that’s the limit of the extra revenue we might have.”

He added, “Let’s underscore and be respectful of the negotiating process which we will enter into in a full good faith effort with our colleagues of DEC and other negotiating teams.

“The challenge here is how do we actually address the structural concerns we have, what are the options that we have so we don’t continually prepay from the surplus what should be going into our fund balance and find our solution through reductions in force.”

Meg Krulee, DEC’s representative to the Finance Committee expressed concern, saying she was “cautiously, cautious.” She said she hoped “as we move forward and think about options that we are continually thinking about resources aligned to our priorities … and thinking about serving our students.”

The Finance Committee plans to continue discussions in October. In November the Committee plans to gather input from the community, and discuss potential options.  

Discussion on Structural Deficit Puts Focus on CPI and Salaries

By Larry Gavin

The Finance Committee of the District 65 School Board listened to a presentation on the District’s “structural deficit” at its Sept. 8 meeting. The purpose was “to educate ourselves,” said Candance Chow, chair of the Finance Committee, who said it was the first of a series of meetings that would ultimately get to the point of “what do we do about it.”

Paul Goren, superintendent, said he reached out to members of the District’s financial sustainability strategic planning committee to seek their input on the structural deficit. Two of them, Therese McGuire, professor and chair, management and strategy department, Kellogg School of Management, Northwestern University, and Andrea Mainelli, senior advisor to Tyton Partners and a principal of Charlestown Advisors LLC, spoke at the meeting.

 Dr. McGuire explained, “You have a structural deficit if the trend in the growth rate of expenditures is faster than the trend in the growth rate of revenues.”

“The only way to solve a structural deficit,” she said, “is to bring up the growth rate of your revenues or bring down the growth rate of your expenditures, or a little of both.”

Balancing a budget by making cuts that do not bring the growth rate of expenses in line with the growth rate of revenues will not solve the problem, but may simply leave the district in the position of making cuts year after year.

Ms. Mainelli said, “Unless the structural deficit is tackled and solved, the level of spending will be a painful thing you’ll have to do year after year after year.”

The District is budgeting an operating surplus of $1.1 million for the 2015-16 school year (FY’16), after making significant staff reductions and cuts in non-personnel expenses totaling about $2.3 million. The plan is to use $900,000 of the surplus to prepay expenses in FY’17 to bring down the projected deficit for that year to $731, 866.

Due to the structural deficit, the District is then projecting operating deficits of $3.6 million in FY’18, $6 million in FY’19, and $4.4 million in FY’ 20.

The Structural Deficit

Dr. Goren said the District’s cost for salaries and benefits is increasing at a faster pace than its property tax revenues, which are subject to State imposed property tax caps. This is a recurring pattern.

Dr. Goren listed three main drivers of the structural deficit.

First, with some exceptions, the District may increase property taxes by 5% or the Consumer Price Index (CPI), whichever is less.  In the last ten years, the CPI has averaged 2.15% per year. In the last five years, it has averaged 1.88%; in the last 3 years, it has averaged 1.33%; and in 2014, it was 0.8%, said Dr. Goren.

“The limit is the CPI, and as that has gone down precipitously from 2012 to 2014, it’s a deep concern as we move forward,” he added.

Second, in the last ten years, student enrollment has increased by a total of 1,016 students, or by 18%. Dr. Goren said this has led to an additional $15 million in expenses over last ten years, but that the District only receives about $350,000 a year in new property taxes.

Third, the increase in salary costs has frequently exceeded the CPI, and has done so consistently since 2012, Dr. Goren said. The increases budgeted for the 2015-16 school year are 4.51% for teachers, 3.67% for teacher assistants, 3.65% for administrators, 3.48% for secretaries/clerical, 3.13% for custodial/maintenance, and various other rates for other job categories.

The take-away is that the growth rate of salaries for all job categories is higher than the CPI, he said.  

Salaries have often been governed by contracts negotiated between the District 65 School Board and the District Educators Council (the teachers’ union) and other employee groups. The contract with DEC expires at the end of this school year.

Board Member Comments

Claudia Garrison asked, “Are we saying that what we should really be doing is just making sure our employees keep level with inflation?”

Dr. Goren said, “I don’t know the answer to that. I think we have to pay attention to where the CPI is and have some way if we look at our curves … as the CPI shifts, our salary structure should shift accordingly.”

Ms. Garrison responded, “Then if you factor in things like incentive pay and rewards for performance and all that, that kind of throws that out the window.”

Dr. Goren replied, “But what’s the goal here. The goal is about addressing the structural deficit and what are the causes and drivers of the structural deficit. We’ve got to be sensitive to all that. But we still have to look at the CPI because that’s the limit of the extra revenue we might have.”

He added, “Let’s underscore and be respectful of the negotiating process which we will enter into in a full good faith effort with our colleagues of DEC and other negotiating teams.

“The challenge here is how do we actually address the structural concerns we have, what are the options that we have so we don’t continually prepay from the surplus what should be going into our fund balance and find our solution through reductions in force.”

Meg Krulee, DEC’s representative to the Finance Committee expressed concern, saying she was “cautiously, cautious.” She said she hoped “as we move forward and think about options that we are continually thinking about resources aligned to our priorities … and thinking about serving our students.”

The Finance Committee plans to continue discussions in October. In November the Committee plans to gather input from the community, and discuss potential options.